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Buy-Here-Pay-Here Dealer Laws

Unlike traditional new vehicle dealers who sign conditional sale and lease agreements as initial creditors and then assign substantially all such contracts to third party finance sources, Buy-Here-Pay-Here (BHPH) Dealers operate under a business model where they hold their sales and lease agreements and collect payments directly from their customers. A series of major newspaper articles highlighting abuses in the BHPH sector sparked enactment of legislation prohibiting abusive practices. Most of the legislative proposals initially sought to cover all dealers but were narrowed in scope to cover only BHPH dealers in the face of strong CNCDA opposition.

Buy-Here-Pay-Here Definition: The most important provision of the BHPH law is the definition of a Buy-Here-Pay-Here Dealer—which establishes the types of dealers that must comply with the onerous new requirements. The BHPH provisions apply only to dealers who assign less than 90% of non-cash, non-rescinded, conditional sale and lease agreements to unaffiliated third-party finance or leasing sources within 45 days of consummation (Vehicle Code section 241). The laws specify that they do not apply to leasing companies who primarily lease vehicles two model years old or newer, or to dealers who certify 100% of their vehicles, are registered with BAR, and employ at least 5 ASE-certified master technicians (Vehicle Code section 241.1). This definition effectively exempts almost all new vehicle dealers, leasing companies, and “big box” used car dealers such as Car Max.

Used Vehicle Written Warranty Requirement: Civil Code section 1795.51 prohibits BHPH dealers from selling or leasing vehicles without providing a written warranty meeting the following requirements (which must be accurately reflected on the used car buyer’s guide):

Duration: the earlier of 30 days from date of delivery, or 1,000 miles from the odometer reading disclosed on the contract.

Covered Components:

  1. Engine, including all internally lubricated parts;
  2. Transmission and transaxle;
  3. Front and rear wheel drive components;
  4. Engine cooling system;
  5. Alternator, generator, starter, and ignition system, not including the battery;
  6. Braking system;
  7. Front and rear suspension systems;
  8. Steering system and components;
  9. Seatbelts;
  10. Inflatable restraint systems installed on the vehicle as originally manufactured;
  11. Catalytic converter and other emissions components necessary for the vehicle to pass a California emissions test;
  12. Heater;
  13. Seals and gaskets on components described in this subdivision;
  14. Electrical, electronic, and computer components, to the extent that those components substantially affect the functionality of the components listed above.

The warranty shall provide that the BHPH dealer shall pay 100% of the cost of labor and parts for any repairs pursuant to the warranty and may not charge the buyer or lessee for the cost of repairs or for inspecting the vehicle, tearing down the engine or transmission or other part, or for any deductible.

The warranty shall provide that if the buyer or lessee notifies the BHPH dealer that the vehicle does not conform to the warranty, the BHPH dealer shall either repair the vehicle to conform to the warranty, reimburse the buyer or lessee for the reasonable cost of repairs, or cancel the sale or lease contract and provide the buyer or lessee with a full refund, plus a reasonable amount for any damage sustained by the vehicle after the sale or lease, excepting damage caused by any non-conformity with the warranty.

The BHPH dealer or its agent may elect to provide the buyer or lessee with a full refund, plus a reasonable amount for any damage sustained by the vehicle after the sale or lease, excepting damage caused by any non-conformity with the warranty, rather than performing the repair. In the event the BHPH dealer cancels the sale or lease, the following shall apply:

  1. The BHPH dealer shall give written notice to the buyer or lessee of the election to cancel the sale or lease by personal delivery or first-class mail.
  2. The buyer or lessee shall return the vehicle in substantially the same condition as when it was delivered, excepting reasonable wear and tear and any non-conformity with the warranty.
  3. The BHPH dealer shall provide the buyer or lessee with a receipt stating (i) the date the vehicle was returned to the BHPH dealer, (ii) the vehicle identification number, (iii) the make, year, and model of the vehicle, (iv) the odometer reading at the time the vehicle was returned to the BHPH dealer, (v) a statement that the BHPH dealer has cancelled the sale or lease, and (vi) the amount of the buyer’s or lessee’s refund.
  4. The BHPH dealer shall not treat the return of the vehicle as a repossession.
  5. The buyer or lessee shall execute documents necessary to transfer any interest in the vehicle to the BHPH dealer or to remove the buyer or lessee from any registration or title documents.
  6. The BHPH dealer shall refund to the buyer or lessee all amounts paid under the sale or lease agreement plus a reasonable amount for property damage sustained by the vehicle after the sale or lease, excepting damage caused by any non-conformity with the warranty. The refund must be paid not later than the day after the date on which the buyer or lessee returns the vehicle and the notice of election to cancel is given to the buyer or lessee.

Any Used Car Buyer’s Guide displayed on a vehicle offered for sale or lease by a BHPH dealer shall list each of the systems and components covered under the warranty and shall specify that the BHPH dealer will pay 100% of the cost of parts and labor for repairs covered by the warranty.

Payment Collection Prohibitions: Civil Code section 2983.37 strictly limits a BHPH dealer’s use of electronic tracking and starter-interruption devices to enforce payment obligations and prohibits BHPH dealers from requiring that payments be made in person (aside from the down payment). BHPH dealers may not repossess a vehicle or impose any charges on the grounds that the deferred down payment was not made in person.

Used Vehicle “Fair Market Price” Posting Requirement: Vehicle Code section 11950 requires BHPH dealers to affix a label on any used vehicles offered for retail sale, disclosing the vehicle’s “Reasonable Market Value”—defined as the “average retail value of a used vehicle based on the condition, mileage, year, make, and model of the vehicle, as determined within the last 60 days by a nationally recognized pricing guide that provides used vehicle retail values or pricing reports to vehicle dealers or the public.” The BHPH dealer must also provide a prospective purchaser with a copy of any information obtained from the pricing guide that was used to establish the “Reasonable Market Value.”

California Emission Standards and “The 7,500 Mile Rule”

Under California law, no California business or resident may import, deliver, purchase, rent, lease, acquire, or receive a new motor vehicle that is not certified as compliant with California emissions standards. For purposes of the prohibition, a vehicle is considered new if it has an odometer reading of less than 7,500 miles—hence the name: “The 7,500 Mile Rule.”  The prohibition also extends to the importation or sale of new vehicle engines that are not certified to California emission standards.

Any person who violates any of these provisions is liable for a civil penalty of up to $37,500 per vehicle. California courts interpret this law as meaning liability attaches not only to the dealership, but also to the dealer principal individually.  A California court of appeal case, State Air Resources Board v. Wilmshurst (1999) , held that a dealership and its principal can both be found liable and individually fined for a violation of this law. Furthermore, vehicles that are the subject of a violation will be denied California DMV registration and will be required to be removed from the state.

The exceptions to the 7,500 Mile Rule are very limited in scope, but include when a California resident: (1) obtains the vehicle as part of an inheritance or divorce settlement; or (2) purchases the vehicle out of state to replace a California registered vehicle that was stolen while out of state, or purchases the vehicle out of state to replace a California registered vehicle that was destroyed or became inoperative beyond reasonable repair while out of state, provided that such replacement vehicle is acquired out of state at the time the previously owned vehicle was damaged, became inoperative, or was stolen.  Also, a person moving to California from another state may register a new federally certified vehicle if it was first registered by the owner in his or her home state and that person provides satisfactory evidence to the DMV of the previous residence and registration.

1971 and newer vehicles are required to have an emission control label indicating whether they were manufactured to meet California or U.S. standards. To find out whether a car or truck is California certified, check the emission control label that should be affixed in the engine compartment or under the hood. At the top of the label are the words “Vehicle Emission Control Information” and the corporate name or trademark of the manufacturer. If the vehicle is California certified, the label will state that the vehicle conforms to California regulations or that it is legal for sale in California. If a vehicle is federally certified, the label will state that the vehicle conforms to U.S. EPA regulations, but no mention will be made of meeting California requirements.

Enforcement. Enforcement of the 7,500 Mile Rule by the Air Resources Board (ARB) is directly linked to the Smog Check Program and DMV’s electronic database of odometer readings. Each time a vehicle is smog-tested (including smog tests performed in connection with the transfer of a vehicle) a licensed smog technician is required to record the vehicle’s current mileage and scan the vehicle’s emission bar code. The bar code identifies whether the vehicle is California certified. Non-California-certified vehicles are electronically “red-flagged” by BAR and DMV and cross-referenced against odometer information obtained either through the Smog Check Program or registration paperwork submitted to DMV. Suspicious transactions are referred to ARB for enforcement action. DMV will not register a “red-flagged” vehicle until its emission status is resolved.

Warning Signs. Dealers should be cautious of the following transactions:

Purchasing or taking in on trade a non-California-certified, low-mileage, late-model vehicle that is registered in another state. Once such a vehicle has been denied California registration, the owner might try to trade it in rather than remove it from the state.

Courtesy deliveries to California residents on behalf of an out-of-state dealer. A good rule of thumb is to never accept a drop-shipped new car that is not California certified.

Even if these vehicles have more than 7,500 miles, it could be the subject of a violation if the owner improperly imported it and attempted to register it with DMV before it reached the threshold.

NOTE

Avoid the Risk: Run a KSR Inquiry: To eliminate the risk of acquiring a vehicle that may be “red-flagged,” dealers are advised to run KSR inquiries on suspicious vehicles through DMV prior to purchase. Once a VIN has been “red-flagged,” it is next to impossible to get the vehicle registered. We are aware of one instance where a California dealer purchased a non-certified car at auction with close to 20,000 miles on the odometer, only to find that the vehicle had been “red-flagged” due to an earlier attempt to register the vehicle in state when it was under the 7,500 mile threshold. The dealer was unable to remove the flag, and forced to sell the vehicle out of state. If the dealer had run a KSR inquiry on the vehicle prior to purchase, the red-flag status would have been made clear.

It cannot be overemphasized that a violation of the 7,500 Mile Rule is a strict liability offense. This means that inadvertence, mistake, or negligence on the part of a dealer will not negate or mitigate the fact that a non-California certified vehicle was received, imported, or sold before its odometer read 7,500 miles. Moreover, purchasing a non-California certified vehicle with less than 7,500 miles and then driving it until it passes the threshold prior to resale or registration is also prohibited (dealers usually get caught because the seller’s odometer statement reflecting the under 7,500 mile odometer reading must be submitted to DMV as part of the registration process). Consequently, if such a vehicle is imported or obtained by a dealer, a fine from ARB can be expected. In order to lessen the damage, evidence that the dealership has unwound the purchase and removed the vehicle from the state will likely be seen by the ARB as evidence of good faith and may result in a reduction of the $5,000 fine.

In one case, a dealer purchased two non-California certified vehicles with less than 7,500 miles at an out-of-state factory auction without checking the emission labels. After smog testing the two units, the dealer discovered their certification status and was able to unwind the auction deals before the vehicles were retailed. Despite the dealer’s good faith efforts, ARB cited the dealer for a violation and offered to settle for a $2,500 per vehicle fine. The dealer countered at $2,000 per vehicle. The ARB responded by filing a Superior Court complaint seeking a separate $5,000 per vehicle penalty against the dealership and each of its principals. The case ultimately settled for $10,000. Inspection of the emission label prior to purchase should be a standard procedure anytime a vehicle with less than 7,500 miles is to be purchased.

California Tire Fee

California Public Resources Code provides as follows:

    1. For purposes of this section, “California tire fee” means the fee imposed pursuant to this section.
    2. 1) A person who purchases a new tire, as defined in subdivision (g), shall pay a California tire fee of $1.75 per tire.
      2) The retail seller shall charge the retail purchaser the amount of the California tire fee as a charge that is separate from, and not included in, any other fee, charge, or other amount paid by the retail purchaser.
      3) The retail seller shall collect the California tire fee from the retail purchaser at the time of sale and may retain 3 percent of the fee as reimbursement for any costs associated with the collection of the fee. The retail seller shall remit the remainder to the state on a quarterly schedule for deposit in the California Tire Recycling Management Fund, which is hereby created in the State Treasury.
    3. The Department, or its agent authorized pursuant to Section 42882, shall be reimbursed for its costs of collection, auditing, and making refunds associated with the California Tire Recycling Management Fund, but not to exceed 3 percent of the total annual revenue deposited in the fund.
    4. The California tire fee imposed pursuant to subdivision (a) shall be separately stated by the retail seller on the invoice given to the customer at the time of sale. Any other disposal or transaction fee charged by the retail seller related to the tire purchase shall be identified separately from the California tire fee.
    5. Any person or business who knowingly, or with reckless disregard, makes any false statement or representation in any document used to comply with this section is liable for a civil penalty for each violation or, for continuing violations, for each day that the violation continues. Liability under this section may be imposed in a civil action and shall not exceed twenty-five thousand dollars ($25,000) for each violation.
    6. In addition to the civil penalty that may be imposed pursuant to subdivision (e), the board may impose an administrative penalty in an amount not to exceed five thousand dollars ($5,000) for each violation of a separate provision or, for continuing violations, for each day that the violation continues, on any person who intentionally or negligently violates any permit, rule, regulation, standard, or requirement issued or adopted pursuant to this chapter. The Department shall adopt regulations that specify the amount of the administrative penalty and the procedure for imposing an administrative penalty pursuant to this subdivision.
    7. For purposes of this section, “new tire” means a pneumatic or solid tire intended for use with on-road or off-road motor vehicles, motorized equipment, construction equipment, or farm equipment that is sold separately from the motorized equipment, or a new tire sold with a new or used motor vehicle, including the spare tire, construction equipment, or farm equipment. “New tire” does not include retreaded, reused, or recycled tires.
    8. The California tire fee may not be imposed on any tire sold with, or sold separately for use on, any of the following:
      1) Any self-propelled wheelchair.
      2) Any motorized tricycle or motorized quadricycle, as defined in Section 407 of the Vehicle Code.
      3) Any vehicle that is similar to a motorized tricycle or motorized quadricycle and is designed to be operated by a person who, by reason of the person’s physical disability, is otherwise unable to move about as a pedestrian.
    9. This section shall remain operative only until January 1, 2024, and as of that date is repealed, unless a later enacted statute, that is enacted before January 1, 2024, deletes, or extends that date.

The CDTFA takes the position that the dealer must collect the California Tire Fee from the retail purchaser or lessee at the time of sale or lease. For rental vehicles, the fee must be either collected by the dealer when sold to the rental company, or self-reported and remitted by the rental company.

Lease Vehicles

The general rule under California’s Sales and Use Tax law has long been that a lease is a continuing sale and purchase. Accordingly, the first lease of a new tire on a new or used motor vehicle, construction equipment, or farm equipment should be treated as a retail sale subject to tire fees.

Spare Tires. It is clear that the Legislature did not intend to collect the fee twice on any tire. Therefore, although a spare tire may never be used, it can only be new once for purposes of the fee. Accordingly, the first retail sale (including a lease) of a new tire should be treated as subject to the fee and no additional fee on that tire is due, even if the tire is never actually put to use.

Demonstrator Vehicles

Section 42885(b)(1) of the Public Resources Code states that “[a]person who purchases a new tire, as defined in subdivision (g), shall pay a California tire fee of $1.75 per tire.” Further, section 42885(b)(3) states that “the retail Seller shall collect the California tire fee from the retail purchaser.”

Under a written opinion issued by the Board of Equalization, once a dealer puts a vehicle into demonstrator service, the dealer is required to self-report and remit the tire fee to the Board of Equalization for the four demonstrator tires on the ground, but cannot charge a tire fee for those four tires when the demonstrator is later sold to a retail customer. The dealer should, however, charge a tire fee to that customer for the unused spare tire. These rules for demonstrators are summarized as follows:

Tires on the ground. Dealers must self-report and pay the tire fee on all tires on the ground, but may not recoup the fee from a subsequent retail purchaser of that vehicle.

Unused Spare Tire. The dealer should charge a tire fee to the customer for the unused spare tire at the time the demonstrator vehicle is sold to the customer.

Vehicles Sold to Rental Car Companies

The Public Resources Code states “[t]he retail Seller shall collect the California tire fee from the retail purchaser at the time of sale…” The Board of Equalization issued an opinion letter clarifying this section as it applies to rental car companies (such as Hertz, Avis, Enterprise, etc.), which purchase motor vehicles from vehicle dealers as wholesale fleet transactions. The Board’s letter states that the tire fee for new rental vehicles can be paid in one of two ways:

Dealer Collection: When a dealer sells a vehicle to a rental company, the dealer may collect the applicable tire fees from the company in the same manner as with a retail customer.

Rental Company Self-Reports and Remits: If a dealer does not collect tire fees from the rental company, the rental company must self-report and remit the tire fees to the California Department of Tax and Fee Administration (“CDTFA”), much like dealers do when putting a new vehicle into demonstration service.

While dealers may collect the tire fee from a rental company purchasing a vehicle, the BOE letter clearly states that dealers will not face liability if they fail to collect the fees:

“Since the dealer likely will not know, at the time the short-term rental company purchases the motor vehicle, how a particular vehicle will be used, if the dealer timely takes a valid resale certificate in good faith from the rental company, the dealer from whom the rental company purchases the vehicle (inclusive of the “new tires”) is relieved from liability for collecting and remitting the Fee on those tires to the Board.”

In such circumstances, the burden will be placed on the rental company to report and remit the appropriate fees to CDTFA.

Vehicles Sold at Wholesale

The Public Resources Code states that the retail seller shall collect a fee from the retail purchaser at the time of the sale. The BOE has concluded that no such requirement exists for the collection of the fee at the time of a wholesale transaction.(This was in response to a question whether the fee would be due for dealer trades or for new motor vehicles sold to a leasing company or converter.)

Vehicles Sold to Government Entities

There is no provision for exemption of the fee on tires sold to government entities. Accordingly, the fee is due for all new tires sold to such entities.

Courtesy Deliveries for Out-of-State Dealers

The Board recognizes a courtesy delivery as a transaction whereby an out-of-state dealer contracts to sell a vehicle to a customer in California and directs the manufacturer to make delivery to the customer at a specified location in California. The manufacturer may then deliver the vehicle to a dealer in California, who will deliver it to the customer in California. If the out-of-state dealer is not engaged in business in California, or does not have a California seller’s permit and dealer’s license from the California Department of Motor Vehicles, the fee and the applicable sales tax must be reported by the California dealer. In this instance, the California dealer is considered to have made the retail sale of the tires. Therefore, the tire fee is due from the California dealer.

Sublet Work

CNCDA solicited guidance from the Board of Equalization relative to the following scenario: A licensed new motor vehicle dealer takes a used vehicle in trade in conjunction with the sale of a new motor vehicle. The dealer is desirous of retailing the trade-in vehicle on its used car lot but the vehicle has two tires that fail to meet the tire tread requirements of Division 12 of the Vehicle Code. As part of reconditioning the vehicle for resale by this dealer, the dealer sublets the replacement of two worn-out tires with a local tire dealer who charges the dealer $1.75 per new tire for the California tire fee.

We are advised that most tire dealers do not differentiate between retail and wholesale transactions for purposes of charging the California tire fee. We assume that the tire fee should only be collected and remitted one time for each new tire sold and that the new motor vehicle dealer in the above factual situation would not be required to charge the purchaser of the used vehicle an additional $1.75 per new tire for the California tire fee. If you agree with our assumption, what type of documentation, if any, will your auditors require our dealer members to maintain to demonstrate that the fee was collected by the tire dealer?

The Board of Equalization responded as follows: If the local tire dealer sold the two new tires to the automobile dealer in a retail transaction, the tire dealer is responsible for collecting the fee from the automobile dealer. The automobile dealer is not subsequently required to collect the fee upon the sale of the used vehicle. However, if the local tire dealer sold the tires to the automobile dealer in a wholesale transaction (i.e., accompanied by a resale certificate) then the automobile dealer is responsible for the collection of the fee when the vehicle with new tires is subsequently sold at retail. If the local tire dealer collects the $1.75 per tire from the automobile dealer in a wholesale transaction (i.e., accompanied by a resale certificate), it would be considered excess fee reimbursement and the local tire dealer would be required to either refund the $1.75 per tire directly to the person who purchased the tire or remit it to the CDTFA. The automobile dealer is required to collect and remit the fee on the retail sale of the new tires on a new or used car.

NOTE

Number of Tires. Be sure that dealership service personnel properly communicate with sales/F&I personnel about the number of new tires installed on used vehicles prior to sale, and that the tire fee is collected for the correct number of tires. Dealers should also be sure that the correct fee is collected for new vehicles that do not include spare tires—many automakers no longer provide spare tires for certain new vehicle models. Dealers should ensure that their DMS software is not automatically programmed to collect $8.75 (the charge for 4 new tires and the spare tire) on all new and used vehicles.

Cancellation of Contracts by Minors

Every now and then a question comes up con­cerning whether a minor (a person under the age of 18) can enter into a binding contract to purchase a vehicle. California law provides that contracts en­tered into by a minor for the purchase of a vehicle can be cancelled by the minor before the minor reaches 18 or within a reasonable period afterwards. There are certain contracts minors are not allowed to can­cel. Such contracts must be for the purchase of things necessary for the support of the minor or the minor’s family and the contract is entered into by the minor when the minor is not under the care of a parent or guardian who is able to provide for the minor or the minor’s family. If a minor enters into a contract for the purchase of a vehicle with a cosigner who is not a minor, the contract is enforceable against the cosigner, but the minor’s liability under the contract can be cancelled by the minor.

Computer Access Issues

Under relevant provisions of the California Vehicle Code, no manufacturer or computer vendor can access or extract confidential dealer records containing personal information without prior written consent of the dealer. Computer vendors are further prohibited from requiring express consent from a dealer as a condition of doing business. However, express consent may be required to protect against fraud; to comply with federal, state, or local laws; to permit investigations; or to make other use of customer information authorized by the customer.

This law also prohibits computer vendors and manufacturers from interfering with lawful efforts of dealers to comply with the federal and state data security and privacy laws. For a deeper discussion of this issue, see CNCDA’s CCPA Compliance Manual.

Consignment Sales

Vehicle Code section 266 defines a consignment as follows: A “consignment” is an arrangement under which a dealer agrees to accept possession of a vehicle of a type required to be registered under this Code from an owner for the purpose of selling the vehicle and to pay the owner or the owner’s designee from the pro­ceeds of the sale.

Vehicle Code section 11729 requires that any dealer engaging in a consignment as defined above must execute a consignment agreement, the form of which is prescribed by Vehicle Code section 11730. If a dealer fails to complete and comply with the terms of the consignment agreement for any vehicle the dealer agrees to accept on consignment, or if the dealer fails to pay the agreed amount to the consignor or his or her designee within 20 days after the date of the sale of the vehicle, there is cause for suspending or revoking the license of the dealer.

Vehicle Code section 11730 requires that the con­signment agreement be in a specified form, and the form must contain the date the agreement is exe­cuted.

A dealer is not required to use the Consignment Agreement form if the consignment is with another dealer, or with a manufacturer, manufacturer branch, distributor or a distributor branch licensed under the Vehicle Code, and the consignment is not otherwise prohibited by the Vehicle Code. Additionally, a dealer conducting retail auction sales on behalf of a fleet owner (a person who is the registered or legal owner of 24 or more vehicles registered in the state or a bankruptcy trustee who owns or has legal control of the vehicles) must use the Consignment Agreement form. The form used in that situation need not include (i) a description of any specific vehicle by year, make, VIN, license, state or mileage; or (ii) the current market value, outstanding lien amount, and lienholder for any specific vehicle.

Consignor’s Rights Can Trump Those of Flooring Lender

When a dealership goes out of business and is holding both floored vehicles and consigned vehicles, disputes often arise between the flooring lender and the consignor as to which one has superior rights to the consigned vehicles. If the flooring lender has filed a UCC-1 financing statement but the consignor has not, the flooring lender may have a superior claim to the consigned vehicles, even though the flooring lender did not originally floor them. A California case has clarified when a consignor, who has not filed a UCC-1, may nevertheless claim superior rights to its consigned vehicles.

In that case, a wholesaler consigned cars to a dealership for sale, but did not file a UCC-1 financing statement covering the consigned vehicles. The dealership’s inventory at that time also included vehicles financed by its flooring lender. The flooring lender was actually aware of the consignment, even though the wholesaler had not filed its own UCC-1 financing statement. Later, the dealership went out of business, and when the wholesaler sought to recover his consigned vehicles, he learned that they had been earlier repossessed by the flooring lender on the strength of the flooring lender’s UCC-1 financing statement. The wholesaler brought suit against the flooring lender to recover the consigned vehicles and prevailed at trial. The case went on appeal, and the California Court of Appeal agreed with the trial court, holding that a consignor has superior rights to its consigned vehicles when the flooring lender has actual knowledge of such consignment, even though the consignor had not filed its own UCC-1 statement.

The significance of this case to consignors and consignees is clear. Dealers and wholesalers who consign vehicles to others for sale should either file a UCC-1 financing statement or take other steps to ensure that the consignees’ secured creditor (usually the floorplan lender) is on notice of the consignment. Conversely, if the dealer acts as a consignee for a wholesaler or another dealer with whom he has a continuing business relationship, the consignee-dealer may want to consider notifying his floorplan lender of the consignment to protect the rights of his consignor and avoid confusion. Of course, a dealer who has any questions concerning any particular consignment situation should always consult with legal counsel.

Consumer Recovery Fund

Overview

During the economic downturn in the late 2000s, the legislature enacted new laws to address the failure by defunct dealers to pay off liens or lease balances on trade-in vehicles, remit proceeds of consignment sales, or pay registration fees to the Department of Motor Vehicles.

These laws require the DMV to collect a $1.00 fee from dealers for each new and used vehicle sold and reported to DMV. The collected funds are transmitted (after paying the DMV’s expenses) to the state Consumer Recovery Fund (“Fund”), which is managed by the Consumer Motor Vehicle Recovery Corporation (“Corporation”). Consumers may file a claim with the Corporation, seeking reimbursement for economic losses related to eligible claims (see “Consumer Application” discussion, below).

Dealer Fee

The statute requires the DMV to charge dealers and lessor-retailers a $1.00 fee for each vehicle sold and reported to the DMV. The statute expressly prohibits dealers from passing the fee on to customers. DMV may not charge a single dealer more than $2,500 in such fees in a single calendar year.

Timeline

The law requires the DMV to collect the fee until the balance of the fund reaches $5,000,000. DMV must then stop collecting the fee within 90 days. Once the balance of the fund is depleted to $2,000,000, DMV will once again collect the fee until the fund’s balance reaches $5,000,000. The cycle continues, ensuring that the fund is maintained at a level sufficient to pay incoming claims, but does not reach an unnecessarily high balance.

Fee Collection

DMV developed a billing practice of sending invoices at the end of each calendar quarter for vehicles sold during the previous quarter, according to the following schedule:

Month Invoice SentMonths Collected
AprilJanuary-March
JulyApril-June
OctoberJuly-September
January October-December

The DMV has been extremely aggressive in collecting these fees, and has filed claims against several dealer bonds for fees past due—requiring swift replenishment of the bond to prevent automatic cancellation of the dealer license. DMV may also take action to suspend or revoke the occupational license issued to a dealer for failing to pay the invoiced amount.

Consumer Application

The statute is designed to assist consumers who have suffered certain economic losses caused by a dealer that is either subject to a bankruptcy petition or is no longer in business. Injured consumers may apply to the Fund for reimbursement of damages if a dealer fails to:

  • Remit to the DMV amounts paid by consumers for license or registration fees;
  • Pay to the legal owner of a trade-in vehicle the amount the dealer is contractually obligated to pay in connection with the purchase of a vehicle by a consumer; or
  • Pay the proceeds of a consignment sale to a consumer consignor.
  • Claim forms and more information are available on the Corporation’s website at: http://www.cmvrc.org/.

Consumers suffering such losses are eligible to submit an application for proceeds from the Fund. The statute of limitations for a consumer to file a claim is limited to 12 months after the dealer ceased selling or leasing motor vehicles to the general public or became subject to a petition in bankruptcy. The amount a consumer may receive from the Fund is limited to $35,000 per transaction.

Once the Corporation receives a completed claim application, it is required to notify the consumer and subject dealer of that fact. The Corporation then has 60 days to decide whether to grant the claim. In the meantime, the subject dealer may contest payment of the claim by filing a written response to the application. The Board of Directors of the Corporation, composed of one consumer representative, two dealers, two public members, and one non-voting representative from the Attorney General’s office, must affirmatively vote to deny a claim within the 60-day period, or the claim is deemed approved. If the claim is affirmatively denied by a vote of the Board, the consumer may seek to contest the denial by seeking a superior court review. If the claim is approved, the Corporation is subrogated to all consumer rights against the dealer to the extent of the payment amount. The Corporation may then bring an action to recover the amount of the payment plus 10 percent interest annually, in addition to costs and attorney’s fees. The consumer may still bring an action against the dealer for other violations of law.

Dealer Penalties

If a consumer is paid on a claim concerning the activity of a former or current dealer, the DMV may refuse to issue a license in the future until that dealer reimburses the Fund for the amount of that claim, plus 10% per year. The DMV may also suspend or revoke a dealer license for failure to repay the Fund for a claim that was paid to a consumer. The DMV, if notified of a claim application, may choose to investigate the dealer for the alleged underlying action.

Corporate Minutes

Corporate minutes have only one purpose: to re­cord meetings of either the shareholders or the direc­tors of a corporation. Technically, shareholder and director meetings, and thus minutes, are required only at pre-determined times set by the bylaws, the legal minimum being once per year, called “regular meetings.” Other meetings are called “special meet­ings,” and are made necessary by proposed corpo­rate action requiring shareholder or board approval. By asking yourself “is it necessary, or desirable, to have the directors or shareholders approve this deci­sion,” you get the answer to the question “are minutes needed?”

Unanimous written consents signed by all of the directors for director action, and all of the share­holders for shareholder action, can substitute for meetings. These consents are usually filed in the Minute Book just as if they were minutes of a meet­ing.

When is shareholder approval required? Only for a limited number of corporate actions, some of which include election or removal of directors, arti­cles of incorporation amendments and certain amendments to the bylaws, sale of substantially all of the corporation’s assets, and approval of loans by the corporation for the benefit of any officer or di­rector.

Board approval is required more often than is shareholder approval. Some of the matters generally requiring board approval include election or removal of officers; adoption or amendment of bylaws; authorization of issuance of stock; borrowing and lending of money, except in the ordinary course of business (for example, approval of a capital loan would be required, but approval of the regular pur­chase of inventory or supplies on credit would not); transactions between the corporation and any of its officers, directors, or shareholders; entering into em­ployment agreements or fixing employee benefit plans for profit sharing arrangements; indemnifica­tion of officers, directors, or employees in any litiga­tion; and declaration of dividends or redemption or repurchase of shares. Additionally, most of the actions that require shareholder approval also require board ap­proval.

Outside of unanimous written consent, duly con­ducted board or shareholder meetings are the exclu­sive means of obtaining the necessary approval. Simply polling the directors and/or shareholders is not enough. Without the required approval, corpo­rate officers or employees carrying out a proposed transaction may be acting outside of their authority. Minutes serve as evidence that the required meetings were held and approvals obtained.

Another consequence of failing to conduct neces­sary meetings and document them by way of minutes is that this laxity in observing “corporate formali­ties” can be considered a factor in support of  “piercing the corporate veil,” a legal doctrine used to hold the shareholders of a corporation directly liable for the corporation’s debts. Although many other factors are also reviewed before such liability is im­posed, unless the exemption for close corporations discussed below is available, diligent observance of director and shareholder meetings and minutes is highly recommended.

Shareholders of California corporations known as “statutory close corporations” can obtain protection against personal liability based upon failure to ob­serve corporate formalities concerning meetings and minutes. California Corporations Code section 300(e) provides that if such failure is pursuant to a close corporation’s shareholders agreement, then it shall not be considered a factor tending to establish that shareholders have personal liability for corpo­rate obligations. To take advantage of this exemp­tion, a corporation must be or become a statutory close corporation (which requires a statement in the articles of incorporation), and all shareholders must enter into an appropriate shareholders agreement.

Credit Card Processing Fees

Dealers sometimes have questions about the use of credit cards for purchases or for down payments. Specifically, dealers have asked whether the bank processing fee, which can generally range from 1% – 3%, may be added to the price of the goods or vehicle being purchased, or somehow passed on to the customer.

Some customers are motivated to use their credit card because of various bonuses and incen­tives available from the card issuer for use of the card.

There are laws on both the state and federal level that deal with this subject. Under Section 1666f of the federal Truth-In-Lending Act, a dealer may offer a customer a discount from the regular price offered by the dealer for the purpose of inducing payment by cash, check, or other means not involving the use of an open-end credit plan or a credit card, and this dis­count would not constitute a finance charge under Truth-In-Lending laws. Under federal law, the avail­ability of the discount must be disclosed “clearly and conspicuously” such that all customers will know that payment other than by credit card entitles them to a discount.

California Civil Code section 1748.1 provides that: “No retailer in any sales, service, or lease transaction with a consumer may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means. A retailer may, however, offer discounts for the pur­pose of inducing payment by cash, by check, or other means not involving the use of a credit card, provided that the discount is offered to all prospec­tive buyers.” Any retailer who willfully violates this section and who fails to pay to the cardholder the amount of the surcharge within 30 days of a written demand by the cardholder by certified mail, is liable to the card­holder for three times the amount of actual damages and the cardholder’s reasonable attorneys’ fees and costs.

Although at one time federal law prohibited a surcharge for credit card fees, that law was later re­pealed. California, however, enacted the surcharge prohibition mentioned above. Even if one were to ar­gue that federal law controls over California law, then under the Truth-In-Lending Act, a dealer would be required to disclose a surcharge for use of the credit card as an additional finance charge which could affect the APR and dollar amount of credit.

As long as there is nothing prohibitive in your merchant agreement with the credit card issuer, dealers can refuse to take credit cards, or limit the use of credit cards to a cer­tain dollar amount. In those cases one might want to consider simply absorbing the card issuer fee. You can also ask the customer to use his or her credit card to transfer cash to a checking account and then use a check for the purchase.

It is certainly permissible to have a policy of cash discounts for purchases by other than credit card, as many merchants do. Other than a cash discount pol­icy, any arrangement to recoup the credit card fees runs the risk of being an illegal surcharge under California law and an undisclosed finance charge under federal law. There are penalties for illegal sur­charges, as noted above, and also for the failure to disclose all finance charges under federal law. Addi­tionally, undisclosed finance charges could lead to a customer’s right to rescind the sales contract because under California’s Automobile Sales Finance Act, every conditional sale contract must contain the disclosures required by federal law and Regulation Z under Truth-In-Lending.

Any policies that a dealership establishes with re­spect to the use of credit cards should be carefully reviewed by your legal counsel.

NOTE

Recently, courts have cast into doubt whether California’s prohibition on credit card surcharges is constitutional. However, as of 2020, the prohibition has not been struck down as to dealerships or vehicle sales. Additionally, as discussed above, vehicle sale and lease transactions are strictly regulated by state and federal law, and there are potential consumer disclosure and advertising issues with imposing credit card surcharges on such transactions. Moreover, merchant agreements may impact a dealership’s ability to impose credit card surcharges. As such, any dealership contemplating imposing credit card surcharges is strongly encouraged to contact competent counsel.

Customer Bankruptcy

What are the risks for a dealer when a customer files bankruptcy shortly after the sale of a vehicle? The primary risks arise from (i) the bankruptcy preference law and (ii) the bankruptcy trustee’s lien on the customer’s property.

Preference Law

Under the bankruptcy preference law, if the customer has transferred property, including a security interest, in the ninety days before the filing of his bankruptcy, the bankruptcy trustee may be able to have the transfer set aside as a “preference” which should come back into the bankruptcy estate for the benefit of all creditors. This means that the security interest in a vehicle given by the customer at the time of sale could theoretically be set aside by the bankruptcy trustee if the customer files bankruptcy within ninety days of the sale. However, the Bankruptcy Code provides that the trustee will not be able to set aside the security interest if the dealer/finance company perfects the security interest within 30 days from the date the customer receives possession of the vehicle. In California, a security interest in a vehicle is perfected when a properly endorsed certificate of ownership has been deposited with the DMV or an application for registration showing the secured party as legal owner has been deposited with the DMV. Accordingly, if the dealer deposits the endorsed certificate of ownership or the application for registration within 30 days of delivering possession of the vehicle to the customer, a bankruptcy trustee will not be able to later set aside the security interest as a preference.

Trustee’s Lien

The bank­ruptcy trustee acquires a lien on all of the customer’s assets as of the date of the filing of the bankruptcy. This lien is superior to and will defeat security interests which are unperfected at the time of the bankruptcy filing. Therefore, if the customer files his bankruptcy case before the time the dealer deposits the properly endorsed certificate of ownership or the application for registration with the DMV, the bankruptcy trustee can defeat the security interest. In order to be protected from the bankruptcy trustee’s claims in this regard, the security interest in the vehicle should be perfected before the customer files bankruptcy.

Bankrupt Customers Lose “Ride-through” Option

In bankruptcy, a debtor is required to provide notice of how he or she intends to handle the payment of a vehicle subject to a lien. In a 9th Circuit decision, the Circuit Court of Appeal effectively ended the “ride-through option”, under which the debtor could keep the car so long as he or she continued to make payments, but would not be responsible for any deficiency balance. The Court ruled that under a 2005 amendment to the Bankruptcy Code, a debtor could no longer select the ride-through option, but instead was required to either surrender the vehicle, redeem the vehicle by paying off its fair market value, or sign a reaffirmation agreement to remain obligated for payment of all installments due under the contract, including any deficiency balance.

Dealer Involvement in Criminal Prosecutions

Dealers can be the victims of criminal conduct, and sometimes customers, vendors, or even employ­ees are the perpetrators. It is natural to want the offenders brought to justice, but how does one go about seeking criminal prosecution, and what dangers are in store for the dealer who does so?

Filing False Police Report

It is initially important to point out that any person who knowingly gives a false report of a crime to any law enforcement officer or district attorney is guilty of a criminal misdemeanor.

Cooperating with District Attorney

Only the offices of the district attorney, city attor­ney, Attorney General, and grand jury control the ultimate decision of whether criminal charges should be filed in court. But a criminal investigation does not begin until the crime is reported to a law en­forcement agency. Each police department and sher­iff’s office has its own procedures for citizen reports of crime. Some departments require forms to be signed by the “complaining party” or “victim,” but law enforcement has the power to conduct investiga­tions and recommend prosecution even if such forms are not signed.

District and city attorneys generally do not like to accept criminal complaints directly from citizens, although they might discuss unusual situations, such as where the law enforcement agency fails to take appropriate action. However, after law enforcement refers the case to the prosecutor’s office for charges to be filed, the prosecuting attorney assigned to the matter will generally assume more day-to-day con­trol. At this point, the prosecutor often wants as much assistance as the victim can offer to help prove the case.

Court decisions in this area have made it riskier for prosecutors to work closely with the victim. An en­tire district attorney’s office can be disqualified from prosecuting a case if the prosecutor’s ability to deal objectively with the defendants is compromised by the victim’s participation. For example, the California Supreme Court upheld the disqualification of the entire Santa Cruz District Attorney’s office when it was discovered that software pioneer Borland paid for expert witnesses used by the D.A. in a trade secrets embezzlement case against a for­mer Borland employee. This forced the state Attorney General’s office to take over from the D.A., a fairly expensive and time con­suming proposition. Some prosecutors now question whether they can accept technical assistance from the victim’s own employees or accountants, as is common in cases of embezzlement.

Immunity from Civil Law Suits

In two cases, the California Supreme Court has ruled that people cannot be sued for reporting suspicious or criminal activity to the police, regardless of their motivation. In Hagberg v. California Federal Bank, a bank customer was detained and handcuffed by the police after a teller mistakenly reported her to police for passing a bad check. In Mulder v. Pilot Air Freight, a man was arrested after a business rival enlisted the police to set up a stolen merchandise sting. The charges were later dropped.

In both cases, the California Supreme Court held that one who reports suspicious or criminal activity to the police is absolutely immune from a damages lawsuit brought by the arrestee. The Court relied upon California Civil Code section 47(b), which bars lawsuits against those who make communications in connection with legislative, judicial, or other proceedings. The Court explained that absolute immunity was necessary to “assure utmost freedom of communication between citizens and public authorities whose responsibility is to investigate and remedy wrongdoing.” The Court noted, however, that this immunity from a damages lawsuit did not apply to circumstances where the arrestee could establish the elements of the tort of malicious prosecution (See below).

Malicious Prosecution

Criminal proceedings against a suspect at a dealer’s urging which do not result in a conviction can later expose the dealer to a lawsuit for malicious prosecution by the suspect. If malicious prosecution is established against the dealer, the dealer can be held liable for all damages suffered by the plaintiff during the arrest, jailing, and prosecution associated with the criminal case, as well as for punitive damages. To sue for malicious prosecution, the plaintiff must prove certain elements, including that the criminal proceedings did not result in a conviction. “Malice” and lack of “probable cause” on the dealer’s part must also be proved against the dealer.

“Malice” does not require a showing of hatred or ill-will; it merely refers to some motive for institut­ing criminal proceedings other than an honest desire to bring a guilty person to justice. For example, a dealer’s long standing dislike of the suspect could be a basis for a finding of malice, as could the filing of a crime report mainly in hopes of recovering money or property from the wrongdoer.

Even with malice, no liability can attach for mali­cious prosecution if the dealer had “probable cause.” Probable cause exists where the person reporting the crime has a sincere belief that the suspect is guilty and has a reasonable basis to support that belief. Advice of legal counsel can sometimes help establish probable cause, so long as all known facts were dis­closed when the lawyer’s advice was sought.

Remember, probable cause for the particular crime for which the suspect is charged is required, not simply probable cause that some crime or ille­gality was afoot. Recommending that the authorities pursue the suspect under a particular crime or stat­ute should be avoided – leave that to law enforce­ment and prosecuting attorneys. Also avoid any ex­aggeration or embellishment on the perceived wrong­ful conduct of the suspect – this could indirectly bring about the filing of more serious charges for which probable cause may be hard to prove.

Do the risk and cost of defending even a baseless malicious prosecution suit make it unwise for dealers to seek criminal prosecution? A law designed to require dismissal of a certain class of meritless suits early in the lawsuit process may help reverse the chilling ef­fect created by the prospect of being sued for malicious prosecution. Code of Civil Procedure section 425.16 is a law enacted to curb so-called SLAPP (Strategic Litigation Against Public Participation) suits. Traditionally these were suits by a land developer charging neighborhood opposi­tion groups with libel and slander of the developer, with the hidden purpose of forcing the opposition groups to expend time and money on defending themselves in court, thereby discouraging their exercise of the rights of free speech and petition for the redress of grievances.

The anti-SLAPP law was drafted in very broad language that goes well beyond the original devel­oper/opposition group setting. Indeed, an amendment to the anti-SLAPP law specifically states that it “shall be construed broadly.” The language is so sweeping that some believe that it can be used to defend against baseless malicious prosecution claims. The California Supreme Court has ruled that malicious prosecution lawsuits are subject to dismissal under the anti-SLAPP law.

The best advice for dealers is to exercise caution and consult with legal counsel. If there has been a verifiable, voluntary confession, or the evidence of guilt is oth­erwise strong, being sued for seeking appropriate criminal prosecution is not likely. If suspicion is high, but there is little evidence to prove guilt, deal­ers should consider adopting a “mere witness” ap­proach, where just the facts as known to the dealer are reported, and all dealership personnel refrain from demanding, requesting, or even recommending that any particular action be taken by law enforce­ment. This can reduce the chance that the suspect will later be able to prove that the dealer’s conduct was actively instrumental in causing the prosecution, or was so aggressive that it could be taken as evi­dence of malice.

Dealer Liability for Damage Caused by Vehicle Thief

A California Court of Appeal ruling has raised the specter of potential dealer liability for damage or injury caused by a thief who steals a vehicle from a dealer’s premises.

In that case, a prison parolee who had just been released from prison spent his release date becoming intoxicated and then wandered into a repair facility operated by the dealer. The parolee had wandered onto the premises just prior to the facility’s closing time but during daylight, and got into a tow truck with keys left in the ignition. The parolee smashed the vehicles parked in front of and behind the tow truck and then tore through a canopy on top of the unlocked gate of the facility. After entering the nearby streets, he smashed into several vehicles and then approximately one mile from the facility, swerved onto a sidewalk and plowed into 11 people waiting at a bus stop. The accident left three people dead and eight people injured. The parolee was convicted of murder and sentenced to a lengthy prison term.

The injured parties and the survivors of the deceased parties brought a lawsuit against the dealership, claiming that the dealership was negligent in not taking adequate steps to protect its vehicle from theft – especially by leaving the keys in the ignition. The trial court ruled in favor of the dealer based on a longstanding California legal principle holding that, absent special circumstances, the owner or bailee of a vehicle is not responsible for damages to third parties caused by the theft of that vehicle. However, the Court of Appeal reversed the trial court’s ruling, holding that, with regard to a “special circumstance vehicle” (meaning one that is not within the ordinary person’s driving experience), the dealership could be liable for the damages and injuries caused by the parolee because it should not have left the keys in the ignition and also should have better guarded its facility from the theft.

This case is citable as current California law on the subject, which means that dealers should make sure to take all reasonable and necessary measures to adequately secure its facilities from theft after the facilities are closed to the public. It is recommended that dealers not leave ignition keys in vehicles that are located in their facilities.

A Dealer’s Right to Refuse Business

A dealer generally has the right to refuse to do business with any individual, provided the refusal to do business does not violate any anti-discrimination laws. For example, California Military and Veterans Code section 394 prohibits discrimination against a member of the military because of that membership. More generally, California Civil Code section 51, also known as the Unruh Civil Rights Act, provides that “All persons within any jurisdiction of this state are free and equal, and no matter what their sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, citizenship, primary language, or immigration status are entitled to the full and equal accommodations, advantages, facilities, privileges, or services in all business establishments of every kind whatsoever.”

A dealer is thus prohibited from refusing to conduct business with an individual because of that person’s sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, citizenship, primary language, or immigration status. Because other personal traits, beliefs, or characteristics which are not specifically identified in this statute can be legally protected against discrimination, a dealer must carefully consider a decision to refuse business and should base such a decision on legitimate business purposes. Legitimate business purposes have been recognized by California Courts to include such things as maintaining order, complying with legal requirements and protecting a business reputation or investment. Subject to the types of legal concerns discussed above, a dealer has no obligation to do business with a potential customer whom the dealer thinks will be more trouble than it is worth.

No Gender Discrimination When Rendering Services. California Civil Code section 51.6, known as the Gender Tax Repeal Act of 1995, provides that no business establishment of any kind whatsoever may discriminate, with respect to the price charged for services of similar or like kind, against a person because of the person’s gender. The penalty for the violation of the statute is the amount of the actual damages suffered by the person discriminated against, plus an amount equal to a maximum of three times the amount of the actual damages, but in no case less than $4,000, and any attorney fees incurred by the person bringing the action (Civil Code section 52.).

Disclosing Identities of Financial Institutions Receiving Credit Applications

Although federal and state law does not require dealers to disclose to their customers the names and addresses of the financial institutions to which their credit applications will be submitted, dealers should be aware that such a disclosure may be required by individual financial institutions. Specifically, a fi­nancial institution may provide in its dealer agree­ment that its name and address must be disclosed by the dealer to a customer submitting a credit applica­tion. By requiring this disclosure, a financial institu­tion can avoid being deemed a “credit reporting agency” for purposes of the Federal Fair Credit Re­porting Act, which might otherwise apply and place significant legal duties on the financial institution re­garding communications between it and the dealer relating to a customer’s credit application.

If a dealer agreement requires this disclosure, the specific terms of the agreement should be followed, but usually the disclosure is given in writing and either included on the credit application form itself, or on a separate written statement given to the customer, or even on a sign posted on the dealership premises.

Dishonored Checks

The law regarding dishonored checks is contained in California Civil Code section 1719. Section 1719 provides for statutory remedies for payees of bad checks, including statutory service charges and treble damages up to $1,500.

CAUTION

Possible Limitation on Damages for Dishonored Check Under Conditional Sale Contract: Although Civil Code section 1719 permits recovery of damages of up to $1,500.00 for a dishonored check, Civil Code section 2982(p) [contained in the Automobile Sales Finance Act] limits the dealer’s recovery to $15.00 for a check dishonored in connection with a payment made under a conditional sale contract – if the contract so provides or if it contains a generalized statement that the buyer may be liable for collection costs. This $15.00 limitation on dishonored checks under section 2982(p) is in conflict with section 1719, and raises a question as to which statute applies. Under general rules of statutory interpretation, if two statutes are in conflict, the statute having specific application to a situation controls over a statute having only general application. A different approach is used by some courts, who resolve conflicts of this type by applying the later enacted statute. Both of these approaches favor section 2982(p) because it applies specifically to transactions under a conditional sale contract and was enacted later than section 1719. Additionally, most conditional sale contract forms – including the Law 553 form – specifically state that damages for a dishonored check under a conditional sale contract are limited to $15.00. Accordingly, the $15.00 damage limitation contained in section 2982(p) would apply to checks dishonored under a conditional sale contract. A dishonored check received in connection with any other type of transaction – including a lease – should still be governed by section 1719.

Environmental Fee

Businesses that employ 50 employees who work more than 500 hours each in California in a calendar year must register with the CDTFA and file environmental fee returns. This annual fee is due to the Board on or before the last day of February and covers the previous calendar year. The fee is based on the number of employees who each worked more than 500 hours in California during the year. Businesses with fewer than 50 qualifying employees are not required to register and pay the fee.

The fee is used for programs that oversee the treatment, storage, and disposal of hazardous waste in California and is administered by the CDTFA on behalf of the Department of Toxic Substances Control.

Fair Debt Collection Practices Act Is Applicable to Dealers

Dealers who have their employees engage in con­sumer oriented debt collection activities on a regular basis in the ordinary course of business should be aware of the California Fair Debt Collection Prac­tices Act This group of statutes prohibits certain types of conduct in connection with the collection of a debt owed by a natural person relating to property or services acquired primarily for personal, family or household purposes (identified as “consumer debt”). By statute the following conduct of a threatening nature is prohibited:

  1. The threat or use of physical force or violence;
  2. The threat that the failure to pay such a debt will result in an accusation (which is false) that the person owing the debt (identified as the “debtor”) has committed a crime;
  3. The threat of or a communication to any person of any facts (except the fact that the debtor has failed to pay a consumer debt) which would defame the debtor;
  4. The threat to sell or assign to another person the obligation involved, combined with a false repre­sentation that such an assignment will cause the debtor to lose any defense to the consumer debt; and
  5. The threat that non-payment of a consumer debt will result in the arrest of the debtor or the seizure, garnishment, attachment, or sale of any property or the attachment of wages of the debtor unless that action is in fact contemplated by the debt collector and permitted by law.
  6. The threat to take any action against the debtor which is prohibited by this title.

With respect to communications (including tele­phone communications) with debtors, persons in­volved in collecting a consumer debt are prohibited from: Using obscene or profane language;

  1. Placing telephone calls without disclosing the caller’s identity;
  2. Causing expenses to any person for long dis­tance telephone calls, telegram fees, or other charges by misrepresenting the purpose of such telephone call, telegram, or similar communication;
  3. Causing a telephone to ring repeatedly or con­tinuously to annoy the person called; and
  4. Communicating, by telephone or in person, with the debtor with such frequency as to be unreasonable and to constitute harassment.

In the context of collection of a consumer debt, the California Fair Debt Collection Practices Act also prohibits certain types of communications to em­ployers and family members of the debtor. Specifi­cally prohibited are communications as follows:

    1. Communications with the debtor’s employer unless the communication is necessary to collect the debt or unless the debtor or his or her attorney has con­sented in writing to such a communication. A com­munication of that type is deemed necessary to col­lect the debt only if it is made for the purposes of verifying the debtor’s employment, locating the debtor or effecting garnishment, after judgment, of the debtor’s wages;
    2. Communicating information regarding a con­sumer debt to any member of the debtor’s family, other than the debtor’s spouse or the parents of a debtor who is a minor or who resides at the same household, prior to obtaining a judgment against the debtor, except where the purpose of the communica­tion is to locate the debtor or where the debtor or his or her attorney has consented in writing to such a commu­nication;
    3. Communicating to any person any list of debt­ors which discloses the nature or existence of a con­sumer debt commonly known as a “deadbeat list” or advertising any consumer debt for sale, by naming the debtor; and
    4. Communicating with the debtor by written communication in such a manner as to display in­formation (such as the name address and telephone number of the debtor) in such a way as to embarrass the debtor. It is however recognized that the disclo­sure, publication, or communication by a debt collec­tor of information relating to a consumer debt or the debtor to a consumer reporting agency or a person reasonably believed to have a legitimate business need for the information is not in violation of this particular statute.

False representations by dealership employees in­volved in consumer debt collection activities should also be avoided, including any of the following:

  1. Written communications which give the false impression that the communication is from an attor­ney or has been approved or authorized by an attor­ney;
  2. Any false representation that a debt collector is vouched for or affiliated with a government agency;
  3. Any false representation that a debtor’s debt will be increased by the addition of attorney’s fees and other investigations costs unless there is a legal basis for that to occur; and
  4. Any false representation that a debtor’s failure to pay a consumer debt has been reported to a con­sumer reporting agency or that legal proceedings will be commenced or that the debt involved will be as­signed to another debt collector.

Communications with debtors involving consumer debts may also be prohibited when the debtor is rep­resented by an attorney and there has been a written notification to the debt collector that all communica­tions regarding the consumer debt are to be ad­dressed to that attorney. This prohibition does not apply if the attorney fails to answer correspondence, return telephone calls, or discuss the obligation in question.

A waiver of any of the provisions of the Fair Debt Collection Practices Act is contrary to public policy and is void and unenforceable. California Civil Code section 1788.33.

A violation of the California Fair Debt Collection Practices Act can subject a dealer to suit and liabil­ity for actual damages sustained by the debtor. Deal­ers who willfully violate these statutes can also be liable for a statutory penalty of $1,000. It is pos­sible this penalty amount could be assessed per vio­lation. This approach would be consistent with a re­cent federal case applying a similar penalty provi­sion of the Federal Fair Debt Collection Practices Act (as a general rule this act does not apply to “in-house” collections). Dealers having specific ques­tions concerning collections activities engaged in by their employees should consult legal counsel.

Federal Restrictions on Selling 15-Passenger Vans

Federal law imposes restrictions on the sale of certain motor vehicles which do not comply with relevant safety and equipment standards. In particular, federal law prohibits the sale of “school buses” that do not meet applicable school bus safety standards and requirements, including, for example, protective seats, emergency exits, special mirrors, stop-arms and four-way/eight-way alternating flashing lights.

A “school bus” is defined under federal law to include any passenger motor vehicle designed to carry a driver and more than 10 passengers, which is likely to be used significantly to transport preprimary, primary and secondary school students to or from school or an event related to school.

Many before and after school childcare facilities use 15-passenger vans to transport children between school and the care facility several times a week. A 15-passenger van that will be used in that way is regarded under federal law as a “school bus” and must therefore meet the school bus equipment and safety standards. Generally, 15-passenger vans do not meet these standards. Accordingly, a dealership’s sale of a 15-passenger van (which does not meet these standards) to a school, school district, or any entity which the dealership is aware will use the vehicle significantly to transport school students to or from school or a school-related event, will violate federal law.

A dealership which violates these strictures is liable to the United States government for a civil penalty of up to $5,000 for each violation. A separate violation occurs for each motor vehicle or item of motor vehicle equipment. Indeed, the National Highway Traffic Safety Administration has been active in assessing civil penalties against dealerships nationwide for selling 15-passenger vans to schools or school districts in violation of federal law.

Fuel Economy Guides

Dealers are required to prominently display, at each location where new automobiles are offered for sale, the EPA/DOE Fuel Economy Guide booklets, and to make them available to the public at no charge. 40 C.F.R. section 600.405-08 – 600.407-08. The booklets must include each model year vehicle offered for sale at the dealership. In lieu of booklets, the dealer can post a notice stating where the customer may access an electronic version of the booklet at the dealership, but the notice must include the link www.fueleconomy.gov, and the customer must be allowed to access and print the booklet at no cost. If a regional edition of the booklet is prepared for California automobiles, then dealers must display the California Regional edition of the booklet. These booklets must be available in sufficient quantities for retention by each prospective purchaser upon the purchaser’s request. The manufacturer’s name and logo or the dealer’s name and address, or both, may appear on the back cover of the booklet.

The dealer must display these booklets in the same manner and in each location used to display brochures describing the automobiles offered for sale by the dealer. The display should also include information that similar booklets containing the EPA Fuel Economy information are also available through mail by writing to Fuel Economy, Pueblo, Colorado 81009.

For copies of the booklets or information concerning these requirements, dealers can either contact the DOE’s EERE Information Center by calling 1-877-337-3463 between the hours of 9:00am and 7:00pm Eastern Time, or by accessing www.fueleconomy.gov/feg/contacts.shtml.

Lienholders Have 15 Days After Payoff To Deliver Title

California law requires lienholders to deliver title within 15 days after the lien has been paid off. The law also requires that lessors must, within 15 days after payment, deliver title to lessees who purchased the vehicle under an option to purchase.

If the lienholder or lessor fails to comply with the 15 day time requirements, it must pay the transferee of the vehicle $25 a day for each day that the time requirements remain unsatisfied, up to a maximum of $2,500. If the lienholder or lessor fails to pay the penalty amount within 60 days following a written demand by the transferee, the amount is tripled, not to exceed $7,500.

Below is a notice which dealers can include with the payoff check, reminding the lienholder about these time periods. The notice includes a copy of Vehicle Code section 5753 where these rules are found.

NOTICE TO FINANCE COMPANY

California law requires that you release your security interest in the vehicle which this check pays off within 15 days of your receipt of this payment and mail, transmit, or deliver the vehicle’s certificate of ownership to the transferee as designated in the enclosed documents. If you fail to do so within the 15 days, you will be subject to a payment to the transferee of $25 a day for every day beyond the 15 days to a maximum of $2,500. The following is a copy of California Vehicle Code section 5753:

    1. It is unlawful for any person to fail or neglect properly to endorse, date, and deliver the certificate of ownership and, when having possession, to deliver the registration card to a transferee who is lawfully entitled to a transfer of registration.
    2. Except when the certificate of ownership is demanded in writing by a purchaser, a vehicle dealer licensed under this code shall satisfy the delivery requirement of this section by submitting appropriate documents and fees to the department for transfer of registration in accordance with Sections 5906 and 4456 of this code and rules and regulations promulgated thereunder.
    3. 1) Within 15 business days after receiving payment in full for the satisfaction of a security interest and a written instrument signed by the grantor of the security interest designating the transferee and authorizing release of the legal owner’s interest, the legal owner shall release its security interest and mail, transmit, or deliver the vehicle’s certificate of ownership to the transferee who, due to satisfaction of the security interest, is lawfully entitled to the transfer of legal ownership.
      2) If a lease provides a lessee with the option to purchase the leased vehicle, within 15 business days after receiving payment in full for the purchase, and all documents necessary to effect the transfer, the lessor shall mail, transmit, or deliver the vehicle’s certificate of ownership to the transferee, who, due to purchase of the vehicle, is lawfully entitled to the transfer of legal ownership
    4. The certificate of ownership delivered pursuant to subdivision (c) shall be signed by the legal owner or lessor to reflect release of the legal owner’s interest or transfer of the lessor’s interest in the vehicle or accompanied by a form provided by the department to accomplish the same result and signed by the legal owner or lessor. If the legal owner or lessor is not in possession or control of the certificate of ownership, the legal owner or lessor shall, within the time provided in subdivision (c) for the mailing, transmittal, or delivery of the certificate of ownership, take any action required by the department to release the legal owner’s security interest or transfer the lessor’s interest in the vehicle and within that time shall mail, transmit, or deliver written notice of its taking that action to the transferee.
    5. A legal owner or lessor that fails to satisfy the requirements of subdivisions (c) and (d), shall, without offset or reduction, pay the transferee twenty-five dollars ($25) per day for each day that the requirements of subdivisions (c) and (d) remain unsatisfied, not to exceed a maximum payment of two thousand five hundred dollars ($2,500). If the legal owner or lessor fails to pay this amount within 60 days following written demand by the transferee, the amount shall be trebled, not to exceed a maximum payment of seven thousand five hundred dollars ($7,500), and the transferee shall be entitled to costs and reasonable attorneys’ fees incurred in any court action brought to collect the payment. The right to recover these payments is cumulative with and is not in substitution or derogation of any remedy otherwise available at law or equity.
    6. A legal owner, upon written request of the transferee, shall disclose any pertinent information regarding the amount of payment and the documents necessary to release the obligation secured by the legal owner’s interest.

Money Judgment versus Right to Possession

When the owner of a motor vehicle retail contract (creditor) files suit against his or her customer who is in default, the creditor has the right to pursue a judgment for possession of the car (or its fair market value) or, in the alternative, may obtain a judgment for the balance owing under the contract. Although the judgment for the balance of the contract is usually a larger amount than the alternative judgment for fair market value of the vehicle, in the past there was a substantial risk when the creditor chose to obtain a money judgment.

In that regard, a number of courts have taken the position that if a creditor obtains a money judgment, the creditor has waived its security interest (and title) to the vehicle, and its rights to possession, and may have become an unsecured creditor. This interpretation stems in part from old Commercial Code cases and the Unruh Act which deals with installment contracts for non-motor vehicle consumer goods such as refrigerators. The net effect of this position could be very troublesome for the creditor, especially if the customer were to subsequently file bankruptcy and have the money judgment discharged (while retaining free and clear title to the vehicle).

There have been a few cases which have dealt with this “election of remedies” issue. Based upon a review of these cases, it now appears that although this area of the law is still somewhat unsettled, the more acceptable view by the courts is that regardless of whether the judgment is for possession of the vehicle (or its fair market value), or, in the alternative, for money on the contract, the creditor does not waive its security interest in the vehicle.

The United States Bankruptcy Appellate Panel in California ruled on an election of remedies issued in a motor vehicle case. In Merchants Recovery v. Egbe, the creditor obtained a money judgment against its customer, then the customer filed a Chapter 13 bankruptcy proceeding and argued that because the creditor had obtained a money judgment, the creditor had waived its security interest in the vehicle. The customer further argued that in light of this “election of remedies,” the creditor was merely an unsecured creditor, having lost its security interest in the car. However, the court held that the creditor had not in fact “waived its collateral” and was still entitled to its security interest in the subject vehicle.

Although there are no recent California cases which have ruled on the “election of remedies” issue in a motor vehicle case, a persuasive argument can be made that this doctrine does not apply to vehicles which are subject to the California Automobile Sales Finance Act. Actual execution on a judgment, however, would probably result in an “election of remedies.” Dealers should consult their own counsel for specific advice if this issue arises.

Notice Required When You Repossess a Vehicle

Under Vehicle Code section 28, whenever a vehi­cle is repossessed under the terms of a Security Agreement or Lease Agreement, the person taking possession shall contact, for the purpose of providing the information required pursuant to subdivision (d) within one hour after taking possession of the vehicle, and by the most ex­peditious means available, the city police depart­ment where the repossession occurred, if it occurred within an incorporated city, or the sheriff’s depart­ment of the county where the repossession occurred, if it occurred outside an incorporated city, or the police department of a campus of the University of California or the California State University if the repossession occurred there. The no­tice to the police department, sheriff’s depart­ment, or campus police should be by the telephone, telegram, or in per­son, and within twenty four hours a written notice must also be forwarded to the police, sheriff, or campus police de­partment.

If the repossession involves two or more vehicles, each vehicle must be reported as a separate event.

Any person failing to notify the city police department, sheriff’s department, or campus police as required by this Vehicle Code section is guilty of an infraction, and shall be fined a minimum of three-hundred dollars ($300), and up to five-hundred dollars ($500). A district attorney, city attorney, or city prosecutor must promptly notify the Bureau of Security and Investigative Services of any conviction resulting from a violation of this law.

One of the purposes of this statute is to alert law enforcement authorities that the vehicle has not been stolen. It is also suggested that you keep a record of your oral and written notifications in the event ques­tions arise as to whether or not proper notification was given. Government Code Sections 26751 and 41612 provide that after possession is taken of any vehicle by or on behalf of any legal owner under the terms of a security agreement or a lease agreement, the debtor shall pay the sheriff or chief of police or a parking authority operated by a city and county a fee of $15 for the receipt and filing of the report of re­possession pursuant to section 28 of the Vehicle Code before the vehicle may be redeemed by the debtor. Except as provided by statute, any person in possession of the vehicle shall not release it to the debtor without first obtaining proof of payment of the fee to the sheriff or chief of police or parking authority operated by a city and county. At the re­quest of the debtor, a person in possession of the vehicle, or the legal owner, may also release the ve­hicle to the debtor provided the debtor pays the $15 fee, plus the administrative fee not to exceed $5, to the person in possession or the legal owner who shall then transmit the $15 fee to the sheriff or chief of police or parking authority operated by a city and county within 3 business days. Failure to transmit the fee within 3 business days shall subject the re­sponsible party to a fine of $50. The statute further provides that proof of payment, or a copy thereof, shall be retained by the party releasing possession to the debtor for the period required by law, and an additional copy must be given to the debtor upon the debtor’s request.

Offsite Sales

Vehicle Code section 11713 makes it unlawful for a dealer to:

(r) Display a vehicle for sale at a location other than an established place of business authorized by the department for that dealer or display a new motor vehicle at the business premises of another dealer registered as an autobroker. This subdivision does not apply to the display of a vehicle pursuant to subdivision (b) of section 11709 or the demonstration of the qualities of a motor vehicle by way of a test drive.

For your reference, Vehicle Code section 11709(b) provides that:

…a dealer may display vehicles at a fair, exposi­tion, or similar exhibit without securing a branch li­cense, if no actual sales are made at those events and the display does not exceed 30 days.

Moreover, Title 13, California Code of Regula­tions, section 270.08(b) provides that:

The provisions of Vehicle Code section 11709(b), which permits a dealer to display vehicles at a fair, exposition, or similar exhibit without securing a branch license extends to public shopping areas, public shopping centers, autoramas and other similar locations or events open to the public and intended to merely bring the dealer’s identity and product to the public attention, provided that:

  1. No sales are offered, attempted, solicited, nego­tiated or otherwise transacted from such loca­tions or at such public event, including the ac­ceptance of cash deposits, trade-in vehicles or any other considerations from persons for the purpose of inducing or binding a sale.
  2. Such locations are available to all dealers li­censed in this state without discrimination as to type of manufacture, make or year of vehicle displayed.
  3. Every dealer participating at such locations or events shall post a sign on the vehicle or vehicles or in close proximity thereto, printed in letters of not less than three (3) inches in height, which shall show the dealer’s name, location and ad­dress of his established place of business and the following statement: “No sales permitted, or de­posits accepted at this location.”

Vehicle Code section 11728 provides for penalties which may be assessed against the dealer for viol­ating the prohibition against displaying a vehicle for sale at a location other than an established place of business authorized by the DMV. The code provides for up to a $2500 fine per violation and imposition of a license suspension of not more than 30 days per violation as part of a compromise settlement agree­ment. Moreover, if no compromise settlement agreement is entered into, the DMV, through an administrative proceeding, may bring an accusation for permanent license revocation.

Because of this prohibition and accompanying stiff monetary and licensing penalties, dealers should thoroughly review their policies and practices rela­tive to the display of vehicles at any offsite location or the sale of a vehicle at a location not authorized by the DMV for that dealer. Vehicles that are dis­played at auto shows, shopping centers, or other such expositions must comply with the provisions of C.C.R. 270.08 (no sales solicitations must take place and the three inch lettered sign “No sales permitted, or deposits accepted at this location” must be either on the vehicles or in close proximity thereto). Vehicles should not be offered for sale or sold at any location for which the dealer who owns the vehicle does not have a branch license issued by the DMV.

Finally, dealers are reminded that Vehicle Code section 11713(q) specifically makes it unlawful for a dealer to consign for sale to another dealer a new vehicle. Any new car dealer who allows another dealer (either another new car dealer or a used car dealer) to take possession of a new car which has not been sold and reported to the DMV as transferred, runs the risk of facing license revocation or suspen­sion for violation of either the consignment prohibi­tion or the display for sale at an unauthorized loca­tion prohibition, or both.

See also discussion in Autobroker chapter in this Guide entitled “Offsite Sales and Deliveries”.

Online Vehicle Sales and Remove Deliveries

Following the initial onset of the 2020 coronavirus pandemic, the DMV issued a memorandum entitled “Online Vehicle Sales and Off-Site Delivery.” With respect to such sales, the memorandum affirmed that dealerships must “comply with all sales related requirements of the [Vehicle Code] before, during, and after the sale of the vehicle.”

The memorandum further includes the following outline of compliance requirements to guide dealerships in lawfully engaging in online sales and remove deliveries:

  • All products must be contracted for sale prior to the delivery of the vehicle.
  • All terms of the transaction must be agreed upon prior to the delivery of the vehicle at an off-site location. Negotiations may not be conducted at the purchaser’s delivery location.
  • All contracts must be signed by the dealership before delivery of the vehicle at the off-site location. The purchaser may sign the contract at the time of delivery.
  • Any person engaged in the negotiation and sale of the vehicle must be a licensed salesperson.
  • A copy of all notices to the consumer required by the VC and the Civil Code must be provided to the purchaser before the purchaser executes all sales related documents, such as the notice of the right to inspection, etc. All Regulation Z disclosures must be provided to the purchaser and the purchaser must be given an opportunity to review prior to purchaser’s execution of sales related documents.
  • All state and local social distancing requirements must be adhered to at the time the vehicle is delivered.
  • Adherence to social distancing requirements and sanitization of the vehicle is required if a test drive of the vehicle occurs.

Although this memorandum was issued during the 2020 pandemic, dealerships should be able to lawfully engage in online sales and remote deliveries by observing the above-mentioned requirements during ordinary times. 

Originating and Duplicating Motor Vehicle Ignition Keys

Dealers Exempt From Licensing Requirements

A locksmith license is generally required for any person engaged in the business of originating keys for locks. However, automobile dealers are specifically exempt from this licensing requirement and may therefore originate ignition keys without having a locksmith license. Duplication of existing ignition keys is also exempt from this licensing law.

Record-Keeping Requirements

The California Penal Code contains record-keeping requirements for persons who originate (not duplicate) keys for the ignition of motor vehicles. Penal Code section 466.6 provides as follows:

    1. Any person who makes a key capable of operat­ing the ignition of a motor vehicle or personal property registered under the Vehicle Code for another by any method other than by the duplication of an existing key, whether or not for compensation, shall obtain the name, address, telephone num­ber, if any, date of birth, and driver’s license number or identification number of the person requesting or purchasing the key; and the regis­tration or identification number, license number, year, make, model, color, and vehicle identifica­tion number of the vehicle or personal property registered under the Vehicle Code for which the key is to be made. Such information, together with the date the key was made and the signature of the person for whom the key was made, shall be set forth on a work order. A copy of each such work order shall be retained for two years, shall include the name and permit number of the locksmith performing the service, and shall be open to inspection by any peace officer or by the Bureau of Collection and Investigative Services during business hours or submitted to the bureau upon request. Any person who violates any provision of this subdivision is guilty of a misdemeanor.
    2. The provisions of this section shall include, but are not limited to, the making of a key from key codes or impressions.
    3. Nothing contained in this section shall be con­strued to prohibit the duplication of any key for a motor vehicle from another such key.

The Bureau of Collection and Investigative Services – the state agency which audits persons for compliance with this law – does not audit automobile dealers for compliance with this law. Indeed, one official of that agency has stated that the agency believes that this law does not even apply to automobile dealers. This position is buttressed by the fact that the work order to be prepared and maintained requires the locksmith license number of the person originating the ignition key – and automobile dealers are specifically exempt from the locksmith licensing law.

Despite the position of the Bureau, the letter of this law would nevertheless appear to apply to automobile dealers, and, until a specific exemption for dealers is approved by the legislature, dealers should follow the record-keeping requirements of this law when originating motor vehicle ignition keys.

“Pay Or I’ll File Charges” is Illegal

When a dealer has been defrauded by a criminal act, there may be a temptation to say to the criminal, “Pay, or I’ll file charges.” However, under California law this could constitute the crime of attempted extortion, and if payment is made under such a threat, the crime of extortion has probably been commit­ted. These types of threats, or similar implied threats, are prohibited by California Penal Code section 518.

Some courts in other parts of the coun­try have criticized this rule. The West Virginia Su­preme Court considered a statute similar to the one in California, and commented that making such a threat a crime “utterly defies both hu­man nature and common sense.” This court thus stated that it was “quite reasonable to ap­proach the man who embezzled the money that we have set aside for our children’s education and offer not to prosecute him if he will return the money to us.”  However, the law in California remains as stated above, and you cannot rely on legal developments in other states as an indicator of what a California court might do.

There is no problem, how­ever, in actually filing criminal charges in a good faith belief you are a crime victim.

“Payment In Full” Checks

What happens when a debtor tenders a check to you in full satisfaction of a debt with the words “Payment In Full” or other similar words noted on the back of the check? If you deposit the check, does this mean that you have settled your claim with the debtor? In California there are two conflicting Code sections which apply to this situation–California Civil Code section 1526 and California Commercial Code section 3311.

Civil Code Section 1526

In accordance with California Civil Code section 1526, enacted in 1987, where a claim is disputed and any check or draft is tendered by the debtor to settle the claim, and the words “Payment In Full” or other similar words are noted on the check or draft, the accep­tance of the check or draft does not constitute a re­lease of your claims against the debtor if you protest by striking out or otherwise deleting that notation on the back of the check. This means that you should cross out the restrictive language on the back of the check and deposit it, after which you can then proceed with your further claim against the debtor. Even if you do not physically strike out or obliterate the words “Payment In Full” on the check but communicate to the debtor that you are not accepting the check as full payment, you may still be protected according to this law.

A recent bankruptcy case held that where the creditor did not physically mark out or obliterate the “Payment In Full” language on the check, but instead sent a letter to the debtor stating that the check was not being accepted as full payment between the parties, the letter was deemed to be a deletion of the “Payment In Full” language under this California law.

Civil Code section 1526 additionally provides that a check tendered with the words “Payment In Full” or similar words will not necessarily constitute full payment of a claim if acceptance of the check by the creditor was inadvertent or without knowledge of the notation. In a 1995 federal case involving this California law, the federal court of appeal held that where a manufacturer received a dealer’s partial payment in a lockbox and automatically cashed it, but thereafter promptly notified the dealer that it did not consent to the terms upon which the check was offered, the acceptance and cashing of the check did not constitute a full satisfaction of the claim.

Please be aware, however, that Civil Code section 1526 specifically states that a creditor shall be conclusively presumed to have knowledge of the “Payment In Full” language on a check if it either (i) accepts the check pursuant to the terms of a previously executed written agreement, or (ii) has been given, not less than 15 days nor more than 90 days prior to the receipt of the check, a written notice from the debtor that a check will be tendered with a restrictive endorsement (“Payment In Full”) and that the acceptance and cashing of the check will constitute full payment of the claim.

Commercial Code Section 3311

California Commercial Code section 3311 can lead to a different result. Commercial Code section 3311, enacted in 1992, generally provides that if a creditor accepts a partial payment containing or including a notation to the effect that the partial payment is being tendered in full satisfaction of the claim, the creditor will be deemed to have accepted the partial payment in full satisfaction of the claim, even if the creditor deletes or crosses out the notation.

Which Statute Controls?

These two statutes are in conflict and cannot be harmonized. Creditors are therefore left with a dilemma: which statute should they follow in this situation? Two relatively recent cases have provided guidance, holding that Commercial Code section 3311 controls and should be followed.

In the federal court case of Directors Guild v. Harmony Pictures, Inc. (C.D. California 1998) 32 Fed.Supp.2d 1184, a federal trial court found that Commercial Code section 3311 was the controlling law because it was enacted more recently than Civil Code section 1526. The federal trial court therefore ruled that a creditor was deemed to have accepted a debtor’s partial payment as full satisfaction of a debt, even though the creditor had crossed out the “paid in full” notation on the check. In the case of Woolridge v. J.F.L. Electric, Inc., the Appellate Division of the San Bernardino County Superior Court reached the same conclusion, holding that Commercial Code section 3311 was the controlling law because it had been enacted more recently than Civil Code section 1526.

The federal trial court decision in Directors Guild is not binding on California trial courts. Likewise, the decision of the Appellate Division of the San Bernardino Superior Court in Woolridge is probably not binding on California trial courts outside of San Bernardino County. Until the conflict between Civil Code section 1526 and Commercial Code section 3311 is reconciled or clarified by the legislature in Sacramento, or by a definitive opinion of the California Court of Appeal or the California Supreme Court, dealers are well-advised not to accept partial payments containing “paid in full” notations without first seeking guidance from their legal counsel.

Protections When Selling to Another Dealer

When a dealer (“first dealer”) delivers possession of a vehicle to anyone in the business of selling or leasing vehicles (“second dealer”) for sale or lease, the first dealer is always in jeopardy of losing any ownership or security interest in the vehicle. Rather than the clear cut victory the first dealer should ex­pect against the second dealer who does not pay for the car, turmoil begins with the appearance of third parties such as the second dealer’s flooring lender, other secured creditors of the second dealer, and possibly a bankruptcy trustee. Without satisfying the requirements discussed below, those third parties may take priority over the first dealer.

To prevent the vehicle from being subject to the security interest of these creditors, certain requirements apply, including giving such lenders actual written notice of the first dealer’s UCC-1 filing before it is filed, and filing the UCC-1 before delivery of the vehicle. The names and addresses of the secured creditors can generally be obtained through a search request to the Califor­nia Secretary of State. Of course, legal counsel should be consulted over the form and content of these notices and other requirements. If vehicles are expected to be delivered to the same dealer in the future, counsel may be able to prepare a blanket fil­ing to cover multiple future transactions. In fact, some dealers require the obligations to be personally guaranteed by the principals of the second dealer, or secured by a letter of credit or other security. Deal­ers are cautioned that Vehicle Code section 11713(q) flatly prohibits the consignment of new vehicles to another dealer.

In the California Court of Appeals case of Minor v. Stevenson (1991) 227 Cal.App.3d 1613, 278 Cal.Rptr. 558, the court addressed the rights of yet another third party against the first dealer: an unse­cured trade creditor of the second dealer. The court ruled that by levying a money judgment against a vehicle sold and delivered by the first dealer to the second dealer, but unpaid for, the trade creditor cut off the first dealer’s rights in the vehicle. Delivering the vehicle under a written contract of consignment, or under a contract of sale, with title being held and registered in the first dealer’s name would make no difference, said the court. While there are innumer­able ways attorneys may be able to distinguish the facts of this case to help dealers facing situations like that of the first dealer, such as showing the creditor knew or should have known that the first dealer claimed title to the vehicle, this case was un­usual in stating that the structure of the deal (such as sale versus consignment) and most mitigating cir­cumstances (such as bounced checks), make no dif­ference. The court’s decision makes clear that only by filing an appropriate UCC-1 financing statement with the California Secretary of State can the first dealer ensure priority over such unsecured creditors of the second dealer.

Even if all of these filing and notice requirements are met, the sec­ond dealer’s sale to a bona fide retail purchaser is generally regarded as cutting off the first dealer’s interest in the vehicle, so cash on or before delivery is really the only way to prevent the possibility of the first dealer becoming a mere unsecured creditor of the second dealer.

Punitive Damages Against a Corporation

There are few things which create more uncertainty or potential fear for a business than a lawsuit for punitive damages. The reason, of course, is that in California punitive damages cannot be covered by insurance. Additionally, juries sometimes get carried away in awarding large amounts of punitive damages.

The awarding of punitive damages is governed by California Civil Code section 3294(a), which states that in non-contract cases, a plaintiff can recover punitive damages against the defendant when he can show by “clear and convincing evidence” that the defendant “has been guilty of oppression, fraud, or malice.”

Section 3294(b) contains a special qualification for employer liability for punitive damages. Subdivision (b) states, in relevant part, that an employer shall not be liable for punitive damages based on an employee’s acts unless “the employer had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud, or malice.” The statute includes an additional qualification for corporate employers, who may not be liable for punitive damages unless the “advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice is on the part of an officer, director, or managing agent of the corporation.”

Although the question of who an officer or director of a corporation is for purposes of punitive damages is relatively straightforward, the question of who a managing agent of the corporation is can be more difficult to determine. The California Supreme Court has clarified who can be considered a managing agent of a corporation for the purpose of punitive damages. In the case of White vs. Ultramar, the issue to be decided was whether a particular “zone manager” for the defendant was a managing agent who could subject the corporation to punitive damages because of her own actions. The court concluded that the legislature intended the term “managing agent” to include only those corporate employees who exercise substantial independent authority and judgment in their corporate decision making and whose decisions ultimately determine corporate policy. The scope of a corporate employee’s discretion and authority under this test is a question of fact on a case-by-case basis. The mere fact that a manager or supervisor can hire and fire employees does not itself necessarily mean that person is a managing agent. A managing agent must be someone who exercises substantial discretionary authority over a decision that ultimately will determine corporate policy.

The court concluded that: “the Legislature intended that principal liability for punitive damages not depend on employees’ managerial level, but on the extent to which they exercise substantial discretionary authority over decisions that ultimately determine corporate policy. Thus, supervisors who have broad discretionary powers and exercise substantial discretionary authority in the corporation could be managing agents. Conversely, supervisors who have no discretionary authority over decisions that ultimately determine corporate policy would not be considered managing agents even though they may have the ability to hire or fire other employees.

In order to demonstrate that an employee is a true managing agent under section 3294, subdivision (b), a plaintiff seeking punitive damages would have to show that the employee exercised substantial discretionary authority over significant aspects of a corporation’s business.”

Rear Seatbelt Disclosure

Dealers are required to make certain disclosures concerning the use of rear seat shoulder harnesses for 1972 to 1990 model year vehicles.

Vehicle Code section 27314.5 provides that no dealer shall sell or offer for sale any used passenger vehicle of a model year of 1972 to 1990 inclusive, unless there is affixed to the window of the left front door or, if there is no window, to another suitable lo­cation so that it may be seen and read by a person standing outside the vehicle at that location, a notice, printed in 14-point type, which reads as follows:

“WARNING: While use of all seat belts reduces the chance of ejection, failure to install and use shoulder harnesses with lap belts can result in seri­ous or fatal injuries in some crashes. Lap-only belts increase the chance of head and neck injury by al­lowing the upper torso to move unrestrained in a crash and increase the chance of spinal column and abdominal injuries by concentrating excessive force on the lower torso. Because children carry a dispro­portionate amount of body weight above the waist, they are more likely to sustain those injuries. Shoul­der harnesses may be available that can be retrofit­ted in this vehicle. For more information call the Department of Transportation Vehicle Safety Hotline at 1-800-424-9393.”

The window notice must remain affixed to the ve­hicle at all times that the vehicle is for sale and the only exception to the window sticker requirement pertains to 1972 to 1990 model year vehicles that are “equipped with both a lap belt and a shoulder harness for the driver and one passenger in the front seat of the vehicle and for at least two passengers in the rear seat of the vehicle.”

In addition to the window sticker requirement, if a nonprofit entity has furnished a dealer with a supply of belt buckle notices free of charge, the dealer must also affix to one rear seat lap belt buckle of every used passenger vehicle (unless the vehicle is either equipped with both lap belt and a shoulder harness for at least two passengers in the rear seat or having no rear seat lap belts) of a model year of 1972 to 1990, inclusive, that has a rear seat, a notice, printed in 10-point type, that reads as follows:

“WARNING: While use of all seat belts reduces the chance of ejection, failure to install and use shoulder harnesses with lap belts can result in seri­ous or fatal injuries in some crashes. Shoulder har­nesses may be available that can be retrofitted in this vehicle. For more information, call the Department of Transportation Vehicle Safety Hotline at 1-800-424-9393.”

Reporting Lost or Stolen Dealer Plates

What do you do if one or more of your dealer plates is lost or stolen? California Vehicle Code section 4458 requires that when “…license plates have been lost or stolen, the registered owner shall immediately notify a law enforcement agency, and shall immediately apply to the [DMV] for new plates….” The handbook for Dealers and Registration Services, section 15.025, advises dealers to use form OL-22 when ordering plates, registration cards or stickers and that a fee is required to replace a lost or stolen dealer plate. Moreover, the OL-22 contains a notice that lost or stolen dealer plates should be re­ported to the police department or sheriff’s office.

Repossession Law

California law, like the law of almost every other state in the country, provides that a party with a se­curity interest in a motor vehicle may use self-help to take possession of it if there has been a default in the security agreement. But, the repossession must be accomplished “without breach of the peace.” If it is impossible to repossess the property without a breach of peace, the creditor must resort to legal ac­tion through a legal proceeding known in California as a Claim and Delivery or Replevin action.

A Mississippi court ruling regarding a statute substan­tially similar to California’s interpreted the meaning of “breach of the peace.” In taking possession of a van, two repossessors drove a quarter of a mile up a driveway past the customer’s house, and when they could not start the van with the key they had for it, they hooked it up to a tow truck and began towing it back down the driveway. At the end of the driveway, the repossessors noticed that the owner of the van was running toward them. However, they ignored him and continued out onto the state highway. The owner gave chase in a pickup, and the tow truck and the pickup were involved in a slight accident. After the owner collected his personal belongings from the van, the repossessors continued on their way with the vehicle.

The court reasoned that a situation that was “fraught with the likelihood of violence,” or actual violence constitutes a breach of peace, invalidating the repossession. In this case, the auto accident was a breach of peace, with the repossessors’ actions of ignoring the owner aggravating the situation. The customer was awarded $5,000 in damages, but pu­nitive damages of $100,000 awarded by the jury were overturned by the Mississippi Supreme Court on the grounds that the action of the repossessors did not rise to the willful, wanton, or reckless level nec­essary for an award of punitive damages.

Business & Professions Code section 7507.13 clears up the issue of who may be liable for wrongful repossession. This law states that so long as the repossessing party hires a properly licensed California repossession agent, the repossessing party cannot be held responsible for the acts or omissions of the repossession agent in carrying out the repossession assignment. However, to be free from liability, a dealer assigning the repossession to the repossession agency may not, by any means, direct or indirect, express or implied, instruct or attempt to coerce the repossession agency to violate any law, regulation or rule regarding the recovery of the vehicle, including laws which prohibit a breach of the peace.

If dealers have questions about whether the repossession might be questionable, legal counsel should be consulted. If a wrongful repossession occurs, the damages assessed by a judge or a jury against the repossessing party can be quite large. Also see discussion below regarding Notice Required When You Repos­sess Vehicle.

CAUTION

Picking Up An Expired Lease Vehicle May Be Considered A Repossession: The California Attorney General has issued a legal opinion providing that when a dealer, at the request of a lessor, picks up a vehicle from a lessee on an expired lease, the dealer is deemed to be “repossessing” the vehicle and therefore needs to hold a license as a repossession agency. In the case at issue, the lessor called the dealer and asked the dealer to retrieve a leased vehicle from the lessee’s residence because the lease had expired. The lessee allowed the dealer to take the vehicle, and the dealer later sold it at action on behalf of the lessor. In his written opinion, the California Attorney General stated that “repossession” occurs when a party having the right to possess a vehicle (the lessor) recovers it from a party who has actual possession of the vehicle (the lessee). The dealer performing this repossession for a lessor therefore needs to be licensed as a repossession agent (Opinion of the California Attorney General, No. 07-204). Although opinion letters from the California Attorney General do not constitute California law or carry the force of law, they nevertheless can carry great weight in a court of law or before administrative agencies, including the DMV and BAR. Accordingly, dealers should exercise caution whenever picking up a vehicle they do not own. The recommended and safe practice is to always hire a licensed repossession agency to pick up any vehicle.

CAUTION

Requirement To Give Notice Of Violent Act: Under California law, whenever a violent act has occurred or been threatened involving a licensed repossession agency in the course of a repossession or attempted repossession, that results in either a police report or bodily harm or injury, the repossession agency is required to send a notice of the violent act or threatened violent act to the person or company who gave the repossession assignment to the repossession agency, and (if the repossession assignor is not the legal owner) to the legal owner of the vehicle. The notice must be in a form provided by the Bureau of Security and Investigative Services and must be sent by the repossession agency within seven days after the violent act or threatened violent act. If a dealer receives such a notice and subsequently gives a repossession or skip trace assignment to a repossession agency on the same vehicle, the dealer is required to advise the repossession agency of the information contained in that notice at the time the subsequent repossession or skip trace assignment is given. Accordingly, a dealer should keep a copy of any such notice in the applicable deal jacket – or in some other accessible location – so that the notice will be readily available to dealership personnel if a subsequent repossession or skip trace assignment is given on the same vehicle. Busi. Prof. Code section 7507.6; Vehicle Code section 11724; Civil Code sections 2984.6 and 2993

Responding to a Summons and Complaint

A dealership which is served with a lawsuit (summons and complaint) should always act promptly to protect its rights:

A. Respond Within 30 Days.

A party served with a summons and complaint is required to file a response with the court within 30 days of service. It is therefore important that a dealership act quickly to notify its legal counsel and also provide its attorney with the precise date of service so that the attorney will know when the 30-day deadline runs. A dealership is well advised to establish an appropriate intake procedure to ensure that any summons and complaint delivered to the dealership is brought to the attention of management as soon as possible.

B. Avoid Entry of Default.

The failure of a dealership to file a response with the court within 30 days of service will expose the dealership to having its default entered by the plaintiff. The effect of a default is serious – it bars the dealership from appearing in the case or asserting any defenses. The entry of a default against the dealership can also jeopardize its insurance coverage (see below). Although a default can be set aside by agreement with the plaintiff or through a motion filed with the court, a dealership should not rely on this. Many plaintiffs refuse to agree to set aside a default, and courts have the discretion to deny such motions.

C. Tender to Insurance Carrier.

In addition to alerting legal counsel, the dealership should promptly tender a lawsuit to its liability insurance carrier regardless of the nature of the lawsuit. Indeed, most liability policies require the dealership to promptly notify the insurance carrier of any lawsuit. Depending upon the nature of the lawsuit, the liability policy may provide coverage for damages, attorney’s fees, or both. By law, however, insurance coverage for punitive damages is not permitted.

Sales and Rentals to Unlicensed, Risky, and Uninsured Drivers

Should a dealer have any concern about whether a vehicle buyer holds a valid driver’s license? Does a dealer have a duty to inquire as to whether a cus­tomer has a license? What about delivery of a vehi­cle to an incompetent driver?

Courts around the country have struggled with these issues, and other related issues, for many years. A California court decision that dis­cusses some of these issues is the case of Dodge Center v. Superior Court. The court decided that the theory of “negligent entrustment” applied in California under both a vehicle code section and under common law (judge-made law). Vehicle Code section 14606 provides that a person shall not employ or hire any person to drive a motor vehicle or knowingly permit or authorize the driving of a motor vehicle owned by him or her or under his or her control, upon the highways by any person unless that person is then licensed for the appropriate class of vehicle to be driven. Vehicle Code section 14604(a) provides that no owner of a motor vehicle may knowingly allow another person to drive the vehicle upon a highway unless the owner determines that the person possesses a valid driver’s license that authorizes the person to operate the vehicle. For purposes of this Vehicle Code section, an owner is required only to make a reasonable effort or inquiry to determine whether the prospective driver possesses a valid driver’s license before allowing him or her to operate the owner’s vehicle. An owner is not required to inquire with the Department of Motor Vehicles whether the prospective driver possesses a valid driver’s license. These statutes have great significance in a test-drive or loaner situation, but do not apply to a dealer once the vehicle has been sold. The common law theory of negligent entrustment, however, remains available to anyone injured by the driver regardless of the fact that the dealer no longer owns the vehicle.

What are the dealer’s duties to be free from liabil­ity for negligent entrustment to an unlicensed driver? The court in the Dodge Center case ruled that a dealer cannot be held liable for negligent entrustment for failure to inquire as to whether or not the buyer is licensed. The court noted that no statute makes it unlawful for a motor vehicle retailer to sell to an unlicensed driver, and no statute imposes on a retailer a duty to inquire as to the purchaser’s license status. In contrast, Vehicle Code section 14608 imposes a duty on one who rents a motor vehicle, requiring inspection of the driver’s license. The court stated: “It follows that a retail seller of motor vehicles may normally assume that a purchaser is either legally entitled to drive the vehicle, or alternatively, if not himself qualified to drive, will not do so, but rather will arrange for a le­gally qualified driver’s service.”

With regard to rental vehicles, Vehicle Code section 14608(a) provides: “A person shall not rent a motor vehicle to another person  unless both of the following requirements have been met:

  1. The person to whom the vehicle is rented is licensed in California or is a nonresident who is licensed under the laws of the state or country of his or her residence.
  2. The person renting to another person has inspected the driver’s license of the person to whom the vehicle is to be rented and compared either the signature thereon with that of the person to whom the vehicle is to be rented or the photograph thereon with the person to whom the vehicle is to be rented.

Section 14608(b) states that this does not prohibit a blind or disabled person who is a non-driver from renting a motor vehicle, if both of the following conditions exist at the time of rental:

  1. The blind or disabled person either holds an identification card issued under California law or is not a resident of California.
  2. The blind or disabled person has a driver present who is either licensed to drive a vehicle in California or is a nonresident licensed to drive a vehicle pursuant to the laws of the state or country of the driver’s residence.

Vehicle Code section 14609 contains further provisions regarding records that must be kept with regard to the rental of vehicles. A record of the registration number of the vehicle, the name and address of the person to whom the vehicle is rented, his or her driver’s license, and the jurisdiction that issued the driver’s license and expiration date, must be kept. If the person renting is a nondriver, the same information must be kept for the nondriver substituting the identification card for the driver’s license. You must also keep the name and address of the licensed driver, his or her driver’s license number, and the expiration date of his or her driver’s license.

There is no prohibition against copying a driver’s license for your recordkeeping purposes, provided it is not copied in such a manner that it could be mistaken for a valid license.

Subsequent court decisions have applied the the­ory of the Dodge Center caseto situations involving potential hazardous driving by a buyer resulting from incapacities other than lack of a driver’s license, such as driver inexperience with a certain type of vehicle. These courts support the view that without actual knowledge of the inca­pacitating condition, or of circumstances which should indicate that the driver is incompetent, a seller cannot be liable for negligent entrustment. A buyer’s obvious intoxication at the time of delivery would be an example of the type of knowledge re­quired for liability. But a sale to a chronic drunk driver would not subject the dealership to liability if unknown; moreover, there would be no duty to in­quire as to whether the buyer had any such driving history.

Although some comfort can be taken from the Dodge Center case, the case assumes throughout that the dealer­ship personnel had never asked for the driver’s li­cense in the first place. The question therefore remains open as to what the dealer must do when the driver’s license is requested, but not produced. One way to be extra careful in that situation would be for the customer to be asked to sign a statement that the customer will have a licensed driver arrange for transportation of the vehicle from the dealership, and that the cus­tomer will not use the vehicle on the public highways until the customer obtains a valid driver’s license.

What about vehicle leases? Vehicle Code section 14606, discussed above, provides in part: “No per­son shall … knowingly permit or authorize the driv­ing of a motor vehicle, owned by him or under his control, upon the highways by any person unless the person is then licensed for the appropriate class of vehicle to be driven.” The lessor of a vehicle is the owner of the vehicle and consequently no vehicle should be leased to an unlicensed driver.

It appears, based upon a recent court decision that, unless the customer has an obvious impairment or incapacity which may render him an unsafe driver, a lessor or car rental company need only make sure that its customer has a valid driver’s license in order to protect itself from liability. In the case of Lindstrom vs. Hertz Corporation, a foreign citizen with a valid driver’s license from his own country rented a car from a rental agency in California. Shortly thereafter, the foreign citizen, not being familiar with the roads in the area, caused an accident, injuring the plaintiff. The plaintiff brought suit against the rental agency for negligent entrustment, asserting that the rental agency had a legal duty to provide a copy of California’s rules of the road before allowing the foreign citizen to rent the vehicle. The court of appeal disagreed. The court held that the rental agency’s only duty was to make sure that the foreign citizen possessed a valid driver’s license from the country where he resided, and had no duty to provide the foreign driver with a copy of the rules of the road. The court stated that absent any evidence that the foreign driver was mentally or physically impaired, it was legally sufficient for the rental agency to ask only for his driver’s license.

A question which has frequently arisen is whether it would be a problem for a dealer to sell a motor vehicle to a customer known to have no liability insurance. The concern stems from California’s Financial Responsibility Law, which requires each driver to carry liability insurance coverage in specified amounts to protect others against personal injury and property damage caused by the driver.

Relevant court decisions have held that the doctrine of negligent entrustment does not apply where the vehicle is entrusted to an uninsured motorist who otherwise appears to be a competent driver. The reasoning of the decisions is that even though the Financial Responsibility Law requires all drivers to carry liability insurance, the lack of such insurance does not make a person an incompetent driver. Accordingly, the sale of a motor vehicle to a buyer known not to have liability insurance should not expose a dealer to legal liability.

The lack of collision insurance on the part of the buyer raises a different concern. Many retail lenders require that vehicles described in contracts assigned to them be covered by physical damage insurance. Your flooring agreement may also require coverage for physical damage insurance before the vehicle is delivered to the customer. The dealer should therefore review its dealer wholesale and retail agreements before delivering a vehicle to a buyer who does not have physical damage insurance coverage.

Teenage Driving by Employees of the Dealership

Under the Drive for Teen Employment Act, 16 and 17 year old employees have on-the-job driving privileges, subject to certain limitations.

Under this law, employees who are under 17 years of age are not permitted to drive automobiles or trucks on public roadways at any time, but may drive vehicles on the dealership property. Employees who are 17 years of age may drive automobiles or trucks on public roadways only if:

    1. Such driving is restricted to daylight hours;
    2. The employee holds a California license valid for the type of driving involved in the job performed and has no record of any moving violation at the time of hire;
    3. The employee has successfully completed a state approved driver education course;
    4. The automobile or truck is equipped with a seatbelt for the driver and any passengers, and the employee’s employer has instructed the employee that the seatbelts must be used when driving the automobile or truck;
    5. The automobile or truck does not exceed 6,000 pounds of gross vehicle weight;
    6. Such driving does not involve –
      – the towing of vehicles;
      – route delivery or route sales;
      – the transportation for hire of property, goods, or passengers;
      – urgent, time-sensitive deliveries;
      – more than two trips away from the primary place of employment in any single day for the purpose of delivering goods of the employee’s employer to a customer (other than urgent, time – sensitive deliveries);
      – more than two trips away from the primary place of employment in any single day for the purpose of transporting passengers (other than employees of the employer);
      – transporting more than three passengers (including employees of the employer); or
      – driving beyond a 30 mile radius from the employee’s place of employment; and
    7. Such driving is only occasional and incidental to the employee’s employment. For purposes of this section G, the term “occasional and incidental” is no more than one-third of an employee’s work time in any workday and no more than 20% of an employee’s work time in any workweek.

At the time of application, prospective driver/employees should sign a waiver authorizing background checks for driving record and driver’s education verification. While the law does not require that dealers conduct motor vehicle record checks, insurance requirements and liability concerns make this a good idea. Prospective driver/employees should be told at the time they are making an application for employment that if hired, they will be required to provide a written signed certification that they meet the criteria above. This certification should include a statement that any falsification or omission of information may result in the employee’s termination. Once completed, the certification should be kept with the employee’s personnel file. Since the law requires that teenage drivers be instructed to wear safety belts, the certification should also include a statement from teenage employees that they have been so instructed.

Tire Chain Disclosure

Vehicle Code section 9953 provides:

[E]very manufacturer of a new motor vehicle sold in this state which, as equipped, may not be operated with tire chains shall do both of the following:

    1. Indicate that fact in the owner’s manual for the vehicle or other written material provided by the manufacturer regarding the vehicle.
    2. Provide each of its franchised new motor vehicle dealers in this state with a list of the affected vehicle models on an annual basis and prior to the manufacturer’s introduction of its new model year vehicle. The list shall include sufficient information, including information regarding tire sizes where necessary, to allow the selling dealers to determine when disclosure is required pursuant to Vehicle Code section 11713.6.

Vehicle Code section 11713.6 makes it unlawful for any dealer to fail to disclose in writing to the buyer or lessee of a new motor vehicle that the vehicle, as equipped, may not be operated on a highway signed for the requirement of tire chains if the owner’s man­ual or other material provided by the manufacturer states that the vehicle, as equipped, may not be op­erated with tire chains. The required disclosure must meet both of the following requirements:

  1. The disclosure shall be printed in not less than 14-point boldface type on a single sheet of paper that contains no information other than the disclosure.
  2. The disclosure shall include the following language in capital letters: “AS EQUIPPED, THIS VEHICLE MAY NOT BE OPERATED WITH TIRE CHAINS BUT MAY ACCOMMODATE SOME OTHER TYPE OF TIRE TRACTION DEVICE. SEE THE OWNER’S MANUAL FOR DETAILS.”

Prior to the sale or lease, the dealer must present the disclosure statement for the buyer’s or lessee’s signature and then must provide the buyer or lessee with a copy of the signed disclosure.

Dealers should be careful in situations where dealer-added equipment, such as oversized wheels or tires, may render a ve­hicle which is otherwise able to accommodate tire chains, unable to do so. In these situations dealers should follow the disclosure rules noted above. Because in these types of cases, the owner’s manual will not give any details, the disclosure should be modified to delete the reference to the owner’s manual.

The signed disclosure document should be retained in the deal file.

Trade-In Payoffs: 21-Day Deadline and Other Rules

Under Vehicle Code section 11709.4, when a dealer purchases or obtains a vehicle in trade in a retail sale (even an all-cash sale) or lease transaction and the trade-in is subject to a prior credit or lease balance, all of the following apply:

  • If the sale or lease contract specifies an amount of the credit or lease balance to be paid on the trade-in and the agreement of the dealer to pay that specified amount is contained in a written agreement documenting the transaction, the dealer must tender the specified amount to the lessor or legal owner of the trade-in or their designee no later than 21 calendar days after acquiring the trade-in (unless a shorter period is specified in writing).
  • If the sale or lease agreement does not contain an agreement regarding payment of the prior credit or lease balance of the trade-in vehicle or does not specify the amount to be paid, the dealer must discharge the entire amount owing on the trade-in no later than 21 calendar days after acquiring the trade-in (unless a shorter period is specified in writing).
  • For any vehicle purchased or obtained in trade, the dealer cannot sell, consign or transfer an ownership interest in that vehicle until the prior credit or lease amount is tendered to the lessor or legal owner or their designee.

A dealer does not violate the 21-day payoff rule if the dealer reasonably and in good faith gives notice of rescission of the contract promptly, but no later than 21 days after the date on which the vehicle was purchased or obtained in trade, and the contract is thereafter rescinded on any of the grounds in section 1689 of the Civil Code (which include mutual consent, mistake, fraud, duress, the material failure of consideration, etc.).

Suggested Procedures to Comply with Payoff Requirements

  • Monitor all trade-in vehicles to ensure that the agreed payoff amount is either tendered within 21 days of taking the vehicle in trade or that a notice of rescission is given to the customer within the 21 day period and the transaction is thereafter properly rescinded.
  • Maintain evidence of compliance by having written proof that the agreed payoff amount was tendered within 21 days or that a timely rescission notice was given to the customer and the transaction was in fact rescinded.

This law does not “extend” the 10-day “Seller’s Right To Cancel” clause contained in most conditional sale contract forms. If you are unable to finance a contract within the prescribed 10 day period, a notice of rescission must be given within the 10 day period (see Inability to Assign Contract or Lease, below).

To document compliance, dealers should retain evidence of a tender of the lien payoff amount to the lien holder or proof that a notice of rescission was given. That evidence could be in the form of an electronic funds transmittal receipt or a copy of the printed check. If regular mail is used to send a payoff check, a photocopy of the outside of the envelope (in which the check is contained) reflecting the lien holder’s name and correct address and the correct date stamped by the dealer’s postage machine should also be retained. If a rescission notice is given to the customer, a copy of the rescission notice should be retained. If rescission is sent by regular mail, a photocopy of the outside of the envelope (in which the rescission notice is contained) reflecting the customer’s name and correct address and the correct date stamped by the dealer’s postage machine should be retained.

Finally, conditional sale contract forms are available that include agreement language requiring the seller to pay off a specific lien amount (otherwise the entire lien amount must be paid). A violation of Vehicle Code section 11709.4 is grounds for dealer license suspension or revocation and is also a criminal misdemeanor.

Unclaimed Property Law

Overview

California’s Unclaimed Property Law requires holders of property that belongs to others to attempt to track down the owners to make them aware that the property is being held. If the owner does not respond, the law requires property holders to annually report that property to the State Controller’s Office (SCO) after a specified period. The SCO will then attempt to locate the owner, but if the property is not claimed within a certain timeframe, the holder is required to remit the property to the SCO. Although businesses may be tempted to keep unclaimed property and record it as income, doing so may lead to significant liability.

This often-ignored requirement has particular bearing upon dealers which hold unclaimed property such as refunded DMV fees, forgotten customer deposits, customer rebates, uncashed checks to vendors, and unclaimed wages and commissions. Since dealers are regularly targeted for audits by the SCO, we urge dealers to pay particularly close attention to these requirements, and to consult competent advisors to ensure compliance.

This section discusses requirements of California’s Unclaimed Property Law, as well as the policies of the SCO, which enforces the law.

State Controller’s Office

The (SCO) is responsible for enforcing California’s Unclaimed Property Law and offers  very helpful resources for unclaimed property holders on its website at www.sco.ca.gov/updrp tg.html.

Changing Landscape

The entire Unclaimed Property program has been under scrutiny from both the judicial and legislative branches recently. In 2007, major revisions were passed as part of the state budget to meet the demands of a federal judge who issued an injunction prohibiting the SCO from accepting or collecting any unclaimed property until the Unclaimed Property program was amended to meet due process standards under the United States Constitution. Although this revision addressed one major concern, other litigation has arisen that challenges the manner in which the SCO handles interest earned on unclaimed property. Further changes were implemented in the 2009 and 2011 legislative sessions. Legislative changes have been introduced in early 2013 to further amend the Unclaimed Property program. Be sure to check the monthly CNCDA Bulletin for future updates on changes to the Unclaimed Property Law.

General Requirements

Property Reportability. The Unclaimed Property Law requires that holders of unclaimed property report funds or other assets belonging to another party after a specified period of abandonment subsequent to the property becoming due and payable. For dealers, the most common properties reported are uncashed DMV refund checks, uncashed paychecks, and uncashed checks to vendors. Dealers should work with their accountants to determine whether other kinds of property they hold may be subject to the Unclaimed Property Law.

The amount of time a business holds property before it is considered abandoned varies by property type. For example, a business must report uncashed salaries, wages and commissions that remain unclaimed one year after becoming payable, while most other property, such as uncashed payments to vendors and uncashed DMV refunds checks, becomes reportable if unclaimed three years after becoming payable.

Notifying the Property Owner—“Due Diligence Letter”. A business must attempt to contact the owner of an account of more than $50 by mail (or electronically, if the property owner has given consent beforehand) at their last known address six to twelve months before the property becomes reportable warning the owner that their property may escheat to the state.

The “due diligence” letter must contain a heading centered at the top with the following wording “THE STATE OF CALIFORNIA REQUIRES US TO NOTIFY YOU THAT YOUR UNCLAIMED PROPERTY MAY BE TRANSFERRED TO THE STATE IF YOU DO NOT CONTACT US.” The letter must also contain a notice, either in bold or in a font at least two points larger than the rest of the letter (aside from the heading), which:

  1. Specifies that since the date of last activity, or for the last two years, there has been no owner activity concerning the property;
  2. Identifies the property by number or other identifier (which need not exceed four digits);
  3. Indicates that the property is in danger of escheating to the estate; and
  4. Specifies that the California Unclaimed Property Law requires banks, banking organizations, and financial organizations to transfer funds of a deposit, account, shares, or other interest if it has been inactive for three years.

The notice must also contain a form allowing the owner to confirm the current address (which, if filled out, signed by the owner, and returned by the holder, is deemed active and begins the escheatment period again). In lieu of returning the form, the dealer may provide a telephone or fax number, or email address with which the owner may contact the dealer. This contact, as long as memorialized and kept by the dealer, serves as confirmation that the account is active and recommences the escheatment period.

The SCO has created a sample due diligence letter, which is available online at: http://www.sco.ca.gov/FilesUPD/outreach_rptg_notice_duediligencesample.pdf.

The law also allows property holders to impose a “due diligence” service charge on the account in an amount not to exceed the administrative cost of mailing or electronically sending the letter, which in no case can exceed $2.00.

Notice Report. If the owner does not claim the property or reinstate the account, the holder must report such funds and property to the SCO prior to November 1st. The report must contain all known owner and property information, including the owner’s name, Social Security Number, last known address, property type, property amount, and the last date of contact with the owner.  While most property must be reported with the name of the property owner, with the exception of traveler’s checks and money orders, all accounts of less than $50 may be aggregated into a single file and reported to the state without itemizing separate accounts.

The report must also contain certain information concerning the property holder, including contact information. If your dealership wishes to give different contact information for the SCO than for the owner of the property, it may do so on the latest forms. Businesses are required to annually report unclaimed property to the SCO by filing Form UDS-1 (for reports filed on paper, which are only allowed if fewer than 10 properties are reported) or UFS-1 (for reports filed on electronic media) and any applicable schedules. The SCO strongly recommends that the report be filed electronically in all circumstances. Electronic filings must be made in the newest National Association of Unclaimed Property Administrators (NAUPA) format, known as NAUPA II. If reporting more than ten items of unclaimed property, electronic reporting is mandatory. The NAUPA II software is available for free download online at: http://www.wagers.net/hrs/downloads.php.

NOTE

Original Signature For Electronic Filing: Although the SCO strongly encourages electronic filing, property holders are still required to provide a “wet” signature to prove that the filing was verified by an individual, a partner, an officer, or an employee authorized by the holder. For reports to be properly verified, the SCO requires an original signature on all Universal Holder Face Sheets (UFS-1). Reporting Agents submitting multiple reports at one time will be allowed to submit a transmittal letter with an original signature that lists all reports being submitted. Reports with UFS-1 forms that do not contain an original signature may be subject to interest at a rate of 12% per annum from the date the property should have been reported or remitted with the signature. Failure to comply with this very technical requirement could end up costing a substantial amount of money!

Once the SCO receives this report, it will attempt to locate and contact the property owner (if the amount unclaimed is at least $50), and provide the holder’s contact information and instructions for claiming the property. If the property remains unclaimed, the holder must remit the property, along with a similar Remit Report, to the SCO.

Remit Report. If property remains unclaimed after submittal of the Notice Report, the holder must remit the property to the SCO between June 1 and June 15 of the following year, along with a Remit Report detailing the property being sent. The report should be submitted in the same format as the Notice report, and include a hard copy of the UFS-1 form. Payment of unclaimed cash in the amount of $20,000 or more must be paid by electronic funds transfer, or the holder will face a 2% penalty. If property reported on the Notice Report has subsequently been claimed by the owner, the holder may either exclude those claims from the remit report, or may include the claims on the report, showing a $0 remittance amount.

If new accounts are identified that were not included on the Notice Report, the holder must not include such accounts on the Remit report. Instead, these new accounts should be reported on a Supplemental Holder Notice Report, with another Holder Remit Report sent between 7 and 7 ½ months after the date the Notice Report was filed.

The following table provides guidance concerning the different reporting and remitting deadlines:

Date Property Escheats to State
(1-3 years of inactivity)
Due Diligence Letter to OwnerNotice Report Due Date to SCORemit Report Due Date to SCO
July 1, 2011 – June 30, 2012October 31, 2012 – April 30, 2013October 31, 2013June 1-15, 2014
July 1, 2012 – June 30, 2013October 31, 2013 – April 30, 2014October 31, 2014June 1-15, 2015
NOTE

Alternative Reportability Calendar: The SCO allows businesses to calculate whether property is reportable “as of” either June 30th or their own fiscal year-end preceding this date. If the “as of” date falls between January 1 and June 30, the Holder Notice Report is due before November 1 of the same year. If the “as of” date falls between July 1 and December 31, the Holder Notice Report is due before November 1 of the following year.

Time Limits. Records of unclaimed property must be maintained for at least seven years after being reported to the SCO. While the SCO’s internal policy is to audit a business for the past ten years of unclaimed property activity, they deviate from this policy as the situation warrants—at times looking into records well-beyond ten years. There is no statute of limitations regarding escheatment of property, meaning businesses may be liable from the time the statute was first implemented—1960.

Penalties for Non-Compliance

The fine for willfully failing to file the annual report is $100 per day, capped at $10,000. For willfully failing to remit the property to the state, a business can be fined in an amount ranging from $5,000 to $50,000. These failures to act can only be considered willful, however, if the business has failed to respond to a written notice from the SCO. Even if no warning is provided and the failure to act is not considered willful, businesses are liable for interest at a rate of 12% per year of the amount not reported or remitted, starting from the date the property should have been remitted. If the holder pays or delivers unclaimed property in a timely manner, but files a noncompliant report, the 12% interest still applies, but is capped at $10,000.

Professional Assistance

The Unclaimed Property laws are complicated and confusing. Dealers should check with their accountants to determine appropriate procedures and to assist in compliance with the Unclaimed Property laws. Be sure to ask your accountant about establishing an “Unclaimed Property Liability Account,” into which unclaimed property can be deposited and recorded. Such accounts allow a dealership to keep track of their unclaimed property accounts in a single location for simpler recording and remittance when appropriate.

For more information, consult the SCO’s website: http://www.sco.ca.gov, or call the SCO directly at (916) 464-6088 for compliance information, or (916) 464-6284 for reporting assistance.

Underground Storage Tank Fee

If you own an underground storage tank in California, you may be required to pay a fee for petroleum products placed into the tank. The underground storage tank maintenance fee provides revenues for cleanup programs. Effective January 1, 2010, the fee per gallon is 20 mills ($0.020). On January 1, 2012, the fee will revert back to 14 mills ($0.014) per gallon. Petroleum products that are subject to the fee, include, but are not limited to, gasoline and additives, aviation gasoline and additives, jet fuel and additives, diesel fuel and additives, lubrication oils, heating and lighting oils, and solvents.

For further information, you can call the CDTFA Customer Service Center at (800) 400-7115. The CDTFA also has a Publication 88 entitled Underground Storage Tank Fee, available online at https://www.cdtfa.ca.gov/formspubs/pub88.pdf.

Owners of underground storage tanks must register with the CDTFA. After registration, the CDTFA will let you know how often you will be required to file returns.

Unlawful Subleasing of Motor Vehicles

California Penal Code sections 570-574 make it a crime for a person to engage in an act of unlawful subleasing of a motor vehicle when the person receives compensation or some other consideration for the transfer or assignment of a vehicle subject to a lease contract, conditional sale contract, or security agreement which prohibit such a transfer. These criminal statutes are directed toward agents and middlepersons who attempt to profit from these transactions. California Civil Code section 3343.5 provides for civil damages, including punitive damages, for persons damaged by unlawful transfers of motor vehicles subject to lease or sale contracts. Although these Code sections are not directed at a lessee or purchaser who violates the terms of a lease or sale contract, such an act by the lessee or purchaser can be grounds for civil damages under breach of contract rules.

In People v. Carter, the appellate court upheld the conviction of Thomas C. Carter, the part owner of U.S. Financial Company, a company involved in soliciting lessees for the purpose of having them sublease their vehicle to persons without sufficient credit to purchase or lease vehicles elsewhere. As part of its services, U.S. Financial provided an agreement which committed the sublessee to make the lessee’s monthly payments to the financial institution actually holding the original lease. U.S. Financial was not a party to this agreement. Also, as part of the solicitation, a sublessee was told that if he or she made six months of payments on behalf of the lessee, U.S. Financial would arrange for the vehicle to be financed in the name of the sublessee. U.S. Financial charged a fee for its services which ranged from $1,500 to $5,000. Evidence presented at trial indicated that these subleasing transactions were arranged without the knowledge of the financial institutions holding the original leases and furthermore indicated that the vehicles involved were not refinanced in the name of the sublessees.

In upholding the conviction, the appellate court confirmed that Mr. Carter had violated California Penal Code section 571(b) which provides “a person engages in an act of unlawful subleasing of a motor vehicle when the person is not a party to the lease contract, conditional sale contract, or security agreement, and assists, causes, or arranges an actual or purported transfer or assignment, as described in subdivision (a).” An unlawful transaction or assignment as described in California Penal Code section 571(a) involves a person who is not a party to a lease transferring or assigning an interest in the subject motor vehicle to a person who is also not a party to the lease without the consent of the lessor and this person receives compensation or some other consideration for the transfer or assignment.

The appellate court was not persuaded by Carter’s argument that he did not violate section 571(a), he merely supplied a sublease agreement and personally did not transfer or assign any interest in a leased vehicle. Despite the ambiguity of the statutory language, the appellate court construed Section 571 in a manner consistent with its perception of the legislature’s intent which the court believed was to hold culpable those persons who promote a transfer or assignment of an interest in a motor vehicle without the approval of the lessor.

The appellate court further was not convinced of Carter’s argument that section 571 violated his constitutional rights of equal protection since the lessee of a motor vehicle could engage in this type of conduct without the permission of the lessor and not be subject to criminal prosecution. The appellate court dispensed with this argument by determining that the legislature had a rational basis for distinguishing between the conduct of non-parties and parties to a lease in this context.

Use of Credit Cards by Retail Customers

The use of credit cards has expanded significantly in the past several years. Credit cards are now being used not only for traditional retail purchases, but also in other, less traditional places, such as supermarkets and traffic court. The expanded use of credit cards has spilled over into sales of new and used vehicles – although most typically for the purpose of paying part or all of a down payment. The use of credit cards by retail customers raises a variety of issues which do not arise when the payment is made in the more traditional forms of cash or check.

Acceptance of Card not Prohibited

The law does not prohibit acceptance of credit cards for vehicle purchases or down payments. However, retail finance source agreements usually contain warranties by the dealer that the down payment has been paid in cash or that the down payment was made in the manner described in the contract. A dealer could be charged with breach of such a warranty unless the contract actually discloses that the payment was made by credit card or there is written proof that the lender otherwise knew about the credit card payment before it funded the deal. Another wrinkle: if the dealer knows the use of the credit card will increase the outstanding balance on an open account listed on the credit application, the finance source might charge the dealer with concealment or misrepresentation concerning the credit application.

No Requirement that Dealer Accept Card

No law requires dealers to accept credit cards in lieu of other payment methods. Merchant agreements with credit card issuers often require acceptance of the card as to “all goods and services offered by Merchant.” Many card issuers are now aware, however, of the problems uniquely faced by dealers and are allowing dealers to accept credit cards in the service and parts departments only. Some card issuers allow the dealers to refuse credit cards when the payment would exceed $1,000, or some cap set by the dealer. On the other hand, other card issuers, through their merchant agreements, require the dealer to either accept credit cards for any portion or all of the purchase price (with no cap), or not accept credit cards at all in the sales department, in which event the dealer would have to remove all credit card emblems and logos from the showroom and sales areas.

Prohibition Against Surcharges for Use of Card

See the previous discussion in the section titled “Credit Card Processing Fees.” Basically, dealers cannot raise credit card prices over cash prices, even to pass the credit card transaction fee on to the customer.

Credit Card “Stop Payment” Rights Against Dealers

Legally, any complaint the customer has against the dealer may also be asserted against the credit card issuer, and the customer does not have to pay the charges on his or her credit card bill until the dispute is resolved. The card issuer can immediately charge back the disputed amounts against the dealer. The customer must first try to work out the problem directly with the dealer, and may then be required to raise the dispute with the card issuer – but must do so within 60 days of receiving the credit card bill showing the charge. The credit card issuer then has 60 additional days or more to charge back and investigate. The customer loses all of these rights if he or she pays the credit card bill in full without deducting the disputed charges.

Escalation of Complaint Process

Card issuers have customer service staff to handle billing disputes. These staffs may not handle a billing dispute simply by accepting the dealer’s version of the dispute; the staff is required to obtain and independently assess the customer’s position. Because of their legal and contractual rights of charge back and dislike of open billing items, these staffs can put pressure on dealers to settle, or advise the customer to seek regulatory agency intervention. Since these staffs are versed in the heavily regulated area of mail order charges, where customers have many more legal rights, there may be a tendency to overstate customer rights in all “big ticket” charge situations even if the mail order rules don’t apply.

Additional Warranty or Unwind Rights

Customer disputes, even bogus ones, can initially result in charge backs as discussed above, but the underlying merits of any dispute are still governed by applicable non-credit card law. But by the time a dispute is resolved in the dealer’s favor, the customer may have no cash or credit left. Also, merchant agreements often incorporate extensive rules and regulations drafted by card issuers that sometimes give the customer additional rights. Some of these rules require that merchants have a “fair policy” concerning refunds. Whether the written vehicle sales contract will override these rules is unknown, but the risk remains. Although a legal long shot, dealers should also be aware that a customer who signs a binding purchase contract and uses a credit card for the deposit can try to get out of the deal prior to taking physical delivery based on other provisions of the credit card law relating to charges for unaccepted goods.

Vehicle Safety and Equipment Requirements

California Vehicle Code section 11713(i) provides that no holder of any license issued under Article 1 of Chapter 4 of Division 5 of the Vehicle Code “shall deliver, following the sale, a vehicle for operation on California highways if the vehicle does not meet all of the equipment requirements of Division 12 (commencing with section 24000).” This law, however, “does not apply to the sale of leased vehicles to the lessee if the lessee is in possession of the vehicle immediately prior to the time of the sale and the vehicle is registered in California.” Further Vehicle Code section 24007(a) states that a dealer may not sell a new or used vehicle which is not in compliance with these safety and equipment requirements (unless the vehicle is sold to another dealer, sold to be wrecked or dismantled, or sold exclusively for off-highway use).

The safety and equipment requirements are set forth in Division 12 of the Vehicle Code (Sections 24000 through 28114) entitled “Equipment of Vehicles.” Division 12 is subdivided into five separate chapters: (1) general; (2) lighting; (3) brakes; (4) windshield and mirrors; and (5) other equipment. Selected highlights from each of these chapters are listed below.

Chapter 1. General Provisions.

  • Each vehicle must be in a safe condition to operate and contain all of the equipment specified in Division 12.
  • Each vehicle must be properly smogged (California Health and Safety Code section 43000 et seq.).
  • Each vehicle may not be equipped with any lamp or illuminating device not required or permitted under Division 12. (See Chapter 2 below)
  • Each vehicle may not be modified so that any portion of it (other than the wheels) has less clearance from the roadway than the clearance between the lowermost portion of any rim of any wheel and the roadway. The frame height or body floor height cannot be greater than 23 inches from the ground and the lowest portion of the body floor shall not be more than 5 inches above the top of the frame.
  • For each new vehicle, no dealer shall sell or offer for sale such new vehicle unless (1) it contains a certification by the manufacturer that the vehicle is in compliance with all applicable Federal standards, and that the vehicle actually does conform to these applicable Federal standards; (2) that it bear the manufacturer’s name and gross weight rating of the vehicle; (3) that it bear the trademark of the manufacturer or name and type or model designation and owner’s manual at least regarding light source to be used with lamps; and (4) that it has a manufacturer’s notice affixed to the vehicle confirming that the vehicle has bumpers that can withstand an impact of 2.5 miles per hour with no damage to the vehicle’s body and safety systems. It is the manufacturer’s duty in the first instance to comply with these statutes.

Chapter 2. Lighting.

  • For each vehicle, all lamps and other lighting equipment must be maintained in good working order and equipped with the required voltage.
  • Each vehicle must have tail lamps capable of remaining lighted for a period of at least 15 minutes with the engine not operating.
  • Each vehicle must have at least two headlamps, one on each side of the front of the vehicle, located no more than 54 inches nor less than 22 inches above the road.
  • Auxiliary driving lamps (if on the vehicle) must be mounted on front of car at a height of no less than 16 inches nor more than 42 inches. Optional passing lamps must be mounted on the front at height of not less than 24 nor more than 42 inches.
  • Fog lamps (if on a vehicle) must be limited to no more than two (2) and shall be mounted on the front of a vehicle at a height not less than 12 nor more than 30 inches. Aiming and intensity of the lamps are also regulated. On a motorcycle, the fog lamps must be at a height not less than 12 nor more than 40 inches.
  • Spotlamps also have mounting and intensity requirements.
  • In total, no more than 4 lamps to the front of the vehicle may be lighted at any one time (section 24405 ).
  • Each vehicle must have operational high/low beam indicator.
  • Each vehicle should be equipped with at least two taillamps, one on each side of the vehicle at the same level, at height of at least 15 and no more than 72 inches. The taillamps must be red in color and plainly visible from all distances within 1000 feet.
  • For each vehicle, the taillamp or a separate lamp must be placed so as to illuminate with white light the rear license plate and render it legible from a distance of 50 feet.
  • Red fog taillamps (if on a vehicle) must be limited to no more than 2, and shall be mounted on both sides of rear not lower than 12 inches nor higher than 60 inches (if one only, it must be mounted as far to left as practical, but not closer than 4 inches from edge of stop lamp. Controls must be independent from headlamps, and need an indicator light as well. )
  • Each vehicle shall be equipped with at least two red light stoplamps mounted at the rear at the same level, not lower than 15 inches nor higher than 72 inches above the roadway (section 24603(c)), which are plainly visible from a distance of 300 feet in sunlight and at nighttime (section 24603(e)).
  • A supplemental stop lamp may be mounted inside the rear window so long as it is in compliance with Fed. Motor Vehicle Safety Standard No. 108.
  • Each vehicle shall be equipped with one or more backup lamps, directed so as to project a white light to the rear of the vehicle for a distance not to exceed 75 feet (section 24606(b)). They should only work when in reverse or backing up (24606(c)).
  • Each vehicle must have at least two red reflectors on the rear of the vehicle plainly visible at night from distances within 350 to 100 feet from the rear of the vehicle, and mounted not lower than 15 inches and not higher than 60 inches.
  • Each vehicle must be equipped with turn signal lamps in the front and rear of the vehicle, visible in normal sunlight and at nighttime from a distance of at least 300 feet from the front and rear of the vehicle. Mounted not lower than 15 inches (section 24951(c)).
  • Each vehicle shall have white or amber turn signal lights flashing up front, and red or amber at rear.
  • There are additional requirements for optional lighting such as courtesy lamps, side, cowl or fender lamps, cornering lamps, running lamps, utility flood and loading lamps, deceleration warning lights, acetylene lamps, lamps using diffused non-glaring light, and reflectorizing material.
  • The specifications for color and mounting of certain lamps or reflectors are set forth in section 25950.

Chapter 3. Brakes.

  • Each motor vehicle must be equipped with a parking brake system, separately operated from the service brake system, which is capable of holding the vehicle stationary on any grade on a surface free from snow, ice, or loose material. The parking brake shall be held in the applied position solely by mechanical means (see section 26451(c)).
  • Each vehicle must be equipped with an emergency brake system so that rupture or leakage-type failure of any pressure component of the service brake system will not result in complete loss of function. Every vehicle must be able to permit application of brakes at least once for purposes of bringing vehicle to stop after engine failure.
  • Each vehicle must be equipped with service brake system on all wheels, and a parking brake system, which system shall operate separately.
  • For each vehicle, all brakes and component parts thereof must be maintained in good condition and working order.
  • Each vehicle offered for sale must be tested to ensure a stopping distance on dry, smooth, hard-surfaced road, with a grade not to exceed 1%, at a speed of approximately 20 m.p.h. The vehicle must be able to stop within 25 feet.
  • Additional requirements are set out for air brakes and vacuum brakes.

Chapter 4. Windshields and Mirrors.

  • Each vehicle must be equipped with an adequate windshield.
  • Each vehicle must be equipped with safety glazing material wherever glazing materials are used including doors, windows, windshields and openings in the roof.
  • Each vehicle must have one or two self-operating windshield wipers which meet the requirements set forth in the Federal Regulations, maintained in good operating condition, and which provide clear vision through the windshield.
  • For each vehicle, no object or material can be displayed or affixed to the windshield or side or rear windows, except for 7 inch square signs or stickers in the lower corner of the windshield or rear window farthest removed from the driver; 5-inch square signs or stickers in the lower corner of the windshield nearest the driver;  side windows to the rear of driver; electronic device in center of uppermost portion of interior of windshield within area no greater than 5 inches square; rear window wiper; sun visors; rear view mirror; and a GPS if mounted in a 7-inch square in lower corner of windshield farthest removed from driver or in 5-inch square in lower corner of windshield nearest to driver, if GPS is used only for door-to-door navigation outside of airbag deployment zone.
  • A video event recorder may also be mounted upon the windshield subject to the following conditions. It must be mounted in a seven-inch square in the lower corner of the windshield farthest removed from the driver, in a five-inch square in the lower corner of the windshield nearest to the driver and outside of an airbag deployment zone, or in a five-inch square mounted to the center uppermost portion of the interior of the windshield. The vehicle must have a notice posted in a visible location which states that a passenger’s conversation may be recorded. The video event recorder shall store no more than 30 seconds before and after a triggering event. A registered owner or lessee of the vehicle must be able to disable the device, and the data recorded to the device must be the property of the registered owner or lessee.
  • California has enacted legislation adopting the policy of a forthcoming federal regulation to also exempt video event recorders installed in commercial motor vehicles that can monitor driver performance to improve driver safety. The device must be mounted no more than two inches below the upper edge of the area swept by the windshield wipers, and outside the driver’s sight lines to the road and highway signs and signals. The installation and use of video event recorders in commercial motor vehicles will not be effective until the date the California Highway Patrol determines that the federal regulation on the subject has become effective and provides that the exception will become inoperative if the federal regulation is repealed.
  • Optional tinted safety glass may be installed if (1) safety glazing materials are used; and (2) only in location permitted by standards for the particular type of glass used.
  • Each motor vehicle must have at least two mirrors reflecting to the driver a view of the road to the rear for a distance of at least 200 feet, with one such mirror affixed to the left-hand side.

Chapter 5. “Other Equipment.”

In addition to the foregoing safety and equipment requirements, every vehicle must also be equipped with the following:

  • Each vehicle must have a horn in good working order and capable of emitting sound audible under normal conditions for a distance of not less than 200 feet.
  • Each vehicle is required to have a fuel tank cap made of non-combustible material.
  • Each vehicle is required to have safety belts for each seating position. The safety belts must be in good working order for the use of the driver and all occupants of the vehicle, and must conform to motor vehicle safety standards established by the United States Department of Transportation. Certain notices regarding risk of lap belts, only, may have to be provided by dealer when selling a used vehicle of model year 1972-1990.
  • If a vehicle is equipped with solid tires, (a) the tires must have minimum thickness of resilient rubber of at least 1 inch, if width of tire between 3-6 inches; of 1.25 inches in width between 6-9 inches; and of 1.5 inches in width if more than 9 inches thick.
  • Rubber shall be measured between road surface and nearest metal part to which tire is attached;
  • Condition of rubber shall be such that it extends evenly around the tire, without flat spots or bumps.
  • No vehicle shall be sold which is equipped with any recut or regrooved tires.
  • The tread depth requirements for pneumatic tires are specified in section 27465, including the requirement that each vehicle sold with pneumatic tires shall have tire tread depth of at least 1/32nd of an inch tread deep in any two adjacent grooves at any location of the tire.
  • Each vehicle sold shall have fenders, covers, or other devices, including flaps or splash aprons, to effectively minimize the spray or splash of water or mud to the rear of the vehicle, which shall be at least as wide as the tire tread.
  • Each vehicle must contain a functioning odometer which has not been disconnected or altered, subject to exceptions for authorized repair. If the odometer does not register the true mileage of the vehicle, the odometer should be adjusted to zero, and that should be disclosed in writing, and should be posted on the vehicle.
  • Each vehicle must have a front and rear bumper or any other device designed and intended to prevent the front or rear of the vehicle from coming into contact with any other vehicle.
  • Optional equipment of alarm system may flash lights and sound an audible signal, but not a siren.
  • Optional equipment of child restraint system, if on a vehicle, must conform to federal motor vehicle safety standards.

As stated above, Vehicle Code section 24011 states that a dealer may not sell a vehicle unless it also complies with the National Traffic and Motor Vehicle Safety Act and bears the manufacturer’s certification that the vehicle complies with such standards. Although these federal requirements are imposed on the manufacturer of new motor vehicles, the selling dealer is also held accountable if the manufacturer fails to comply with the federal safety requirements.

Dealers should be aware that a violation of any of the sections of Division 12 of the Vehicle Code constitutes a violation of Vehicle Code section 11713, and therefore could expose a dealership to suspension or revocation of its dealer license together with other civil, administrative, or criminal penalties.

Dealers should refer to the cited provisions of the Vehicle Code or consult their legal counsel if they have any specific questions or problems in this area.

Chapter 6. “License Plate Brackets.”

A dealer may not deliver a motor vehicle for which the DMV issues two license plates unless either of the following occurs:

  1. The motor vehicle is equipped with a bracket or other means of securing a front license plate.
  2. The dealer obtains a signed written acknowledgment from the person taking delivery of the motor vehicle acknowledging both of the following:
      1. The person expressly refused installation of a bracket or other means of securing the front license plate.
      2. The person understands that California law requires a license plate to be displayed from and securely fastened to the front of the motor vehicle and that the hardware necessary to securely fasten the front plate is available from the dealer.

Window Stickers on Vehicles

Federal Monroney Window Sticker (MSRP Sticker)

Federal law requires that each manufacturer affix a window sticker (commonly known as the Monroney Sticker) to the windshield or side window of each new automobile. A “new automobile” includes any passenger car or station wagon; but, as seen below, California also requires a similar sticker for new light duty trucks.

15 U.S.C. 1232 provides as follows:

Every manufacturer of new automobiles distrib­uted in commerce shall, prior to the delivery of any new automobile to any dealer, or at or prior to the introduction date of new models delivered to a dealer prior to such introduction date, securely af­fix to the windshield, or side window of such auto­mobile a label on which such manufacturer shall endorse clearly, distinctly and legibly true and cor­rect entries disclosing the following information concerning such automobile-

    1. the make, model, and serial or identification number or numbers;
    2. the final assembly point;
    3. the name, and the location of the place of business, of the dealer to whom it is to be deliv­ered;
    4. the name of the city or town at which it is to be delivered to such dealer;
    5. the method of transportation used in making delivery of such automobile, if driven or towed from final assembly point to place of delivery;
    6. the following information:
      (1) the retail price of such automobile sug­gested by the manufacturer;
      (2) the retail delivered price suggested by the manufacturer for each accessory or item of op­tional equipment, physically attached to such automobile at the time of its delivery to such dealer, which is not included within the price of such automobile as stated pursuant to paragraph (1);
      (3) the amount charged, if any, to such dealer for the transportation of such automobile to the location at which it is delivered to such dealer; and
      (4) the total of the amounts specified pur­suant to paragraphs (1), (2), and (3);
    7. if one or more safety ratings for such automobile have been assigned and formally published or released by the National Highway Traffic Safety Administration under the New Car Assessment Program, information about safety ratings that—
      (1) includes a graphic depiction of the number of stars, or other applicable rating, that corresponds to each such assigned safety rating displayed in a clearly differentiated fashion indicating the maximum possible safety rating;
      (2) refers to frontal impact crash tests, side impact crash tests, and rollover resistance tests (whether or not such automobile has been assigned a safety rating for such tests);
      (3) contains information describing the nature and meaning of the crash test data presented and a reference to additional vehicle safety resources, including http://www.safercar.gov; and
      (4) is presented in a legible, visible, and prominent fashion and covers at least—
      1. 8 percent of the total area of the label; or
      2. an area with a minimum length of 4 ½ inches and a minimum height of 3 ½ inches; and
    8. if an automobile has not been tested by the National Highway Traffic Safety Administration under the New Car Assessment Program, or safety ratings for such automobile have not been assigned in one or more rating categories, a statement to that effect.

A manufacturer who willfully fails to affix and endorse the required label can be fined up to $1000 for each offense. 15 U.S.C. section 1233(c) provides the following with regard to alteration or removal of the sticker:  

Any person who willfully removes, alters, or ren­ders illegible any label affixed to a new automobile pursuant to section 1232 of this title, or any en­dorsement thereon, prior to the time that such automobile is delivered to the actual custody and possession of the ultimate purchaser of such new automobile, except where the manufacturer relabels the automobile in the event the same is rerouted, repurchased, or reacquired by the manufacturer of such automobile, shall be fined not more than $1,000, or imprisoned not more than one year, or both. Such removal, alteration, or rendering illeg­ible with respect to each automobile shall constitute a separate offense.

Removal of the label prior to sale and delivery is prohibited and is punishable by fines and/or imprisonment. The U.S. Department of Justice (DOJ) enforces the law and in correspondence responding to questions about the law has communicated its position on label removal. DOJ takes the position that the label cannot be removed until after delivery of the new vehicle to the actual custody and possession of the ultimate purchaser (defined as the first person, other than a dealer purchasing in his capacity as a dealer, who in good faith purchases the vehicle for purposes other than resale). Delivery occurs when a vehicle’s keys have been given to the customer, and he or she is free to drive the vehicle from the dealer’s premises without returning.

As a result of the MSRP label having to be affixed to the vehicle at the time of delivery, the label itself becomes the property and responsibility of the purchaser. No provision permits a dealer to place these labels in glove compartments, beneath the floor mats or seats, inside a car’s trunk, or elsewhere. A dealer is not automatically authorized to remove these labels while detailing or cleaning a car. Accordingly, unless new owners expressly indicate they would like this label removed and given to them as a part of a car’s final preparation, the label should remain on the window.

California Requirements for Light Duty Trucks

California law requires a window sticker for new light duty trucks with a manufacturer’s gross vehicle weight rating of 8,500 pounds or less. Vehicle Code section 24013.5 provides as follows:

    1. No dealer shall sell, offer for sale, or display for sale any new light duty truck with a manufac­turer’s gross vehicle weight rating of 8,500 pounds or less unless there is securely affixed to the wind­shield or side window of the light duty truck a label on which the manufacturer has endorsed clearly, distinctly, and legibly, true and correct entries dis­closing the following information concerning the light duty truck:
      (1) 
      The make, model, and serial or identification number or numbers.
      (2)
      The retail price of the light duty truck as sug­gested by the manufacturer.
      (3)
      The retail delivered price, as suggested by the manufacturer, for each accessory or item of op­tional equipment which is physically attached to the light duty truck at the time of its delivery to the dealer and which is not included within the price of the light duty truck as stated pursuant to paragraph (2).
      (4) The amount charged, if any, to the dealer for the transportation of the light duty truck to the location at which it is delivered to the dealer.
      (5) The total of the amounts specified pursuant to paragraphs (2), (3), and (4).
    2. Subdivision (a) applies to every light duty truck sold, offered for sale, or displayed in California which is manufactured on or after September 1, 1988.

California Bumper Strength Notice

Vehicle Code section 24011.3 imposes a requirement on manufacturers or importers of new passenger vehicles for sale or lease to affix to a window or windshield of a vehicle a notice regarding bumper strength.

Fuel Economy Notice

49 U.S.C. section 32908 is a federal law requiring a window sticker regarding fuel economy. The information may be contained in the Monroney MSRP sticker. The requirement of this notice applies to “automobiles,” which are defined as “Any four-wheeled vehicle propelled by fuel which is manufactured primarily for use on public streets” and which has a gross vehicle weight rating of 8,500 pounds or less.

Noncompliance Sticker-Emissions

California Health and Safety Code section 43012(d) provides that if a representative of the California Air Resources Board or the Department of Consumer Affairs finds that a used motor vehicle fails to comply with applicable emissions standards or equipment, the Board or a representative of the Department of Consumer Affairs shall issue a notice to correct. Pending the corrections, the motor vehicle shall prominently display the following disclosure affixed to the windshield in at least 18-point type:

NOT FOR SALE
THIS VEHICLE IS PRESENTLY NOT IN COMPLIANCE WITH THE CALIFORNIA VEHICLE POLLUTION CONTROL LAWS AND MAY NOT BE SOLD UNTIL A VALID CERTIFICATE OF COMPLIANCE HAS BEEN ISSUED.

Foreign Content Labeling

Federal law requires that each manufacturer of a new motor vehicle manufactured after September 30, 1994, and distributed in commerce for sale in the United States, shall establish each year for each model year and cause to be attached in a prominent place on each of those vehicles, at least one label. The label shall contain the following information:

    1. The percentage (by value) of passenger motor vehicle equipment of United States/Canadian origin installed on vehicles in the carline to which that vehicle belongs, identified by the words “U.S./Canadian content”.
    2. The final assembly place for that vehicle by city, state (where appropriate), and country.
    3. If at least 15 percent (by value) of equipment installed on passenger motor vehicles in a carline originated in any country other than the United States and Canada, the names of at least the 2 countries in which the greatest amount (by value) of that equipment originated and the percentage (by value) of the equipment originating in each country.
    4. The country of origin of the engine and transmission for each vehicle.

Dealers are required to maintain the label on each vehicle to which the label is required to be attached.

The information required may be disclosed on the Monroney sticker (MSRP sticker), on the fuel economy sticker, or on a separate label that is readily visible.

Other Stickers

Discussed elsewhere in this Guide are Supplemental or Addendum Price Stickers, FTC Used Car Buyers’ Guides, Rear Seat Belt Notices, and Proposition 65 warnings. Check the Index for reference to these discussions.

What To Do If the Dealership is a Criminal Defendant

There are occasions when a DMV investigator will refer a consumer complaint to the local City or District Attorney for criminal prosecution. This can arise out of complaints of advertising violations, failure to sell at the advertised price, or some other violation of statutes governing the activities of automobile dealers. These are generally misdemeanor cases, but are serious matters because misdemeanor convictions can affect a dealer’s licensing and his ability to obtain another license. A criminal conviction can also be used in a civil action against the dealership, making the civil case a “slam dunk” with regard to liability of the dealership for civil damages. DMV licensing accusations may also follow criminal complaints or convictions. Consequently, criminal complaints should be taken very seriously by dealers.

A little known procedure in the Penal Code can sometimes be utilized to have the criminal complaint dismissed. Penal Code sections 1377 and 1378 provide: “If the person injured appears before the court in which the action is pending at any time before trial, and acknowledges that he has received satisfaction for the injury, the court may, in its discretion, on payment of the costs incurred, order all proceedings to be stayed upon the prosecution, and the defendant to be discharged therefrom… The order is a bar to another prosecution for the same offense.”

If a dealership ever finds itself as a criminal defendant, use of these Penal Code statutes should be considered.

What’s in a Dealer File?

A file on each new motor vehicle dealer licensed in California is maintained in Sacramento. The Sacramento dealer file typically contains records of all documents a dealer files to obtain a license, all dealer changes (such as change of address, officers, directors, and shareholders), and complaints against dealers leading to disciplinary action. In the Sacramento dealer file there will also be bonding information, information regarding dealer plates, records of disciplinary action, and other miscellaneous pieces of information. Any member of the public can obtain a copy of a dealer file; however, the DMV will delete from any material provided to a member of the public any confidential information such as residence addresses and any other information deemed to be confidential. A dealer, however, can obtain a copy of the dealer’s entire file without any deletions for confidentiality.

If a dealer wanted to obtain a copy of the file, a check for the required fee made payable to the DMV should be sent to DMV Occupational Licensing, P.O. Box 932342, Mail Station L224, Sacramento, California 94232-3450. Telephone (916) 229-3151. Call in advance to confirm the amount of the required fee. A dealer requesting a copy of his or her entire dealer file must submit a copy of the dealer’s driver license with the request in order to obtain the unedited version of the file. Processing of the request may take 3 to 4 weeks.

Sometimes a dealer would like to find out who made a complaint to the DMV about that dealer. If there were any complaints that resulted in disciplinary action, those complaints would be in the Sacramento dealer file. If a complaint was made against a dealer and no action was taken by the DMV, that complaint apparently does not go into the dealer’s permanent file. A dealer, however, might be able to obtain a copy of such a complaint from the Investigative Review Unit of the DMV. A letter requesting this information should be addressed as follows: Investigations, 8259 Demetre Avenue, Sacramento, California 95828. Telephone (916) 229-0167. Because Field Offices sometimes keep those complaints for 3-4 years, a similar request can be made to a dealer’s local Field Office.

If there is an ongoing investigation against a dealer, a field office file will be maintained in the local DMV field office. The DMV field office might allow a dealer to have copies of some, but maybe not all, of the documents pertaining to an ongoing investigation which are maintained in the field office file.

California has a Freedom of Information Act which is found in the Government Code. It is called the California Public Records Act. Under the Public Records Act, many public records are open to inspection at all times and copies of public records can be obtained by paying photocopy expenses. Certain records, however, are exempt from inspection and one of the exemptions concerns records of complaints to or investigations by a state agency for law enforcement or licensing purposes. Because of this, pending complaints and investigatory materials pertaining to ongoing investigations may be withheld from any request you might make for copies of documents in your file. In any letter you write requesting records, you can simply state the following: “We are making this Public Records Request pursuant to California Government Code sections 6250, and following. Please advise us of the fee that will be required for duplication of records and we will promptly remit the same. Further, pursuant to Government Code section 6253, we will anticipate your response to this request within the ten (10) days provided.” Then describe the records you are requesting.

Who Can You Sue On Odometer Rollback?

Odometer Law

You get stuck with a car with a rolled back odometer. How far up the chain of ownership can you go in pursuing an odometer lawsuit, and do former owners have to be guilty of wrongdoing before incurring liability? A look at an example may shed light on the subject.

Owner 1 rolled back the odometer on a car in otherwise very good shape and sold to Owner 2. Owner 2 had no way of knowing of the rollback; after several thousand miles, Owner 2 sold to Owner 3. Owner 3, an expert appraiser, noticed some excessive wear and tear on the steering wheel and brake pedal indicative of excess mileage, but had these things cosmetically restored. Shrugging off any suspicions, Owner 3 soon forgot about these things and sold the vehicle in the ordinary course to Owner 4. Owner 4 had absolutely no way to know of the odometer inaccuracy. Owner 4 sells the car to you. Which of these owners can you pursue? The answer depends on how you can fit each owner into one or more of the three primary legal theories at your disposal: contract, fraud, and statute.

Contract Action Against Owner 4. You usually have a legitimate claim against the person selling the car to you. Even if that person is completely innocent of wrongdoing and had no way to know of the mileage inaccuracy, under the law of contracts (governed as to personal property sales by Division 2 of the California Uniform Commercial Code), and absent an “as-is” clause, within the four year statute of limitations you can claim the right to unwind, or seek damages, on the theory of breach of express or implied warranty that the odometer was accurate.

Even if there is an “as-is” clause, if you act promptly, you can claim a right to unwind under various legal theories such as “failure of consideration,” “totally nonconforming goods,” or “mutual mistake” – all devices used to prevent buyers from being stuck with something so far different from what was supposed to be delivered that it would be beyond all fairness to let the transaction stand. These methods require giving a rescission notice immediately after the problem was, or should have been, discovered.

There are no contractual relationships between any of the other members of the chain and you. Without that relationship – called “privity of contract” – you may not pursue any of the other parties for breach of contract, including breach of warranty. As with some of the other theories discussed here, you can sometimes stretch the privity rule to include those working closely with the person from whom you purchased, such as that person’s regular supplier of cars.

Fraud Action Against Owner 1. Fraud claims require a good deal of guilt: proof is required that the person knew he or she was passing on false information, and that the person did so to induce the buyer to act. Anyone who rolled back the odometer, or knowingly lied on the disclosure, can be sued for fraud within the statute of limitations, which runs three years after the problem was, or should have been, discovered.

If Owner 1 was the culprit, can you sue him or her for fraud even though you are several owners away in the chain of title? Yes: Owner 1’s fraud can be considered a continuing representation by Owner 1, and anytime someone down the chain of title repeated or made use of the false information supplied by Owner 1, Owner 1 would be charged with that statement. This is called fraud by indirect communication. This area of law is changing, however. The California Supreme Court’s rejection of the “fraud on the market” theory, for example, means that you must still prove that you reasonably relied on the false information passed down the chain before Owner 1 would be liable.

Statutory Action Against Owner 1. Both California and federal statutes prohibit odometer rollbacks, and both allow buyers to jump past their own sellers, back up the chain of title to sue the culprit. In the case of California law, the suit can seek punitive damages; in the case of federal law, damages can be trebled – multiplied by three – and attorney’s fees may be awarded. The statute of limitations for the federal law is two years from discovery of the problem (one court saying from the first date the problem should have been discovered by any party in the chain of title.

Fraud Action Against Owner 3. Owner 3 was not guilty of an actual rollback, nor of fraud, but was negligent in not investigating further. Suing Owner 3 for negligent misrepresentation would be much harder than in the case of Owner 1 since there is little authority as to whether the indirect communication rule applies to mistakes, however careless, as opposed to true fraud. In fact, one case suggests the rule is limited to cases of intentional fraud. Without the indirect communication rule, you could not win a common law claim for negligent misrepresentation.

Statutory Action Against Owner 3. California’s anti-tampering law relates only to mechanical issues like rollback, disconnect, and repair, whereas the federal law covers those issues plus inaccurate disclosures as well. Can you sue Owner 3 under federal law for providing a false odometer statement? Federal law allows you to pursue any culpable party in the chain of title, regardless of any lack of privity with, or even prior knowledge of, that person. A loophole here can be where a second fraud starts up down the chain of title, which arguably wipes out the first fraud, and the first culprit’s liability, as to sales taking place thereafter.

The federal odometer statute does, in name at least, require proof of an “intent to defraud.” Cases have chipped away at this requirement, however, and a violation of the statute can now be found from any conduct that can be called either reckless or grossly negligent. Some cases have found violations on the basis of “constructive knowledge” of the odometer inaccuracy – a standard very similar to ordinary negligence. As a result, there is a good chance that you could pursue Owner 3 under the federal odometer statute.

No Claim Against Owner 2. You may not pursue Owner 2, the innocent victim of Owner 1. Although just as innocent as Owner 2, Owner 4 was pursued under a contract theory; Owner 2 safely avoids this due to a lack of privity. Even though Owner 2 could have discovered the inaccuracy if he or she had done a title history, or taken the vehicle to a top mechanic, Owner 2’s failure to do so does not amount to an “intent to defraud” under the statute, and does not even approach intentional fraud. If you pursue Owner 4, Owner 4 can pursue Owner 3, Owner 3 can pursue Owner 2, and Owner 2 can pursue Owner 1. Each Owner is liable to the purchaser to whom he or she sold the vehicle on a contract theory, and also on any of the other series discussed above when they apply.

A common perception hampers dealers in court: that their expertise should alert them to odometer problems. This hurts the dealer not only when he or she is being sued, but also when the dealer is pursuing others for odometer cheating. In the above example, if a consumer were to sue Owner 2, and Owner 2 were a dealer, the dealer might have a tough time convincing the court of the dealer’s innocence. On the other hand, if Owner 2 were a consumer, and you as a dealer decided to sue him or her, your chances of success would be negligible, and if you lost the suit, you might then face liability for malicious prosecution.

As shown above, the placement in the chain and behavior of all previous owners must be carefully reviewed in evaluating odometer problems.

Records Retention

Overview

The subject of records retention transforms from regretful bore to priority number one when a dealership gets into a dispute with the IRS, CDTFA, factory, DMV, BAR, lenders, vendors, landlords, or private attorneys for customers and others. This chapter covers the rationale of records retention schedules and discusses requirements for electronic storage of records and data.

Records Retention Schedules

Why Records Retention Schedules are Important

By implementing a policy that identifies what documents need to be retained in physical or electronic format, and for how long, dealers provide clarity in an important area of dealership operations. This clarity can result in much lower storage costs (as most documents can be retained electronically, see below) and it protects dealers from liability. Indeed, if a dealership doesn’t retain important documents for required statutory periods, it may be subject to liability and its ability to defend itself is substantially diminished. Moreover, the inconsistent retention of documents can cast a bad light on any disputed action. For these reasons (and more), it’s important for dealerships to adopt and implement a records retention schedule. 

DMV Regulations on Records Retention

The DMV has adopted regulations on the retention of documents related to the purchase, sale, rental, or lease of vehicles. These regulations require dealers to retain such documents for three (3) years. However, the Automobile Sales and Finance Act separately requires dealers to retain documents related to vehicle sales for at least seven (7) years, or the duration of the contract, whichever is greater. So, any dealership retention policy for documents pertaining to the purchase and sale of motor vehicle should have a retention period of at least seven (7) years (and not the 3-year period required by the DMV). And as a best practice, CNCDA recommends that dealers retain all documents pertaining to the sale or lease of a vehicle for at least ten (10) years.

The DMV regulations are somewhat unique because they require the physical retention of documents. The regulations provide that for a period of at least 90 days, a dealer shall maintain all original business records at its principal place of business after the purchase, sale, rental, or lease of a vehicle. After the initial 90 day period, a dealer may store documents electronically or off-site. If the documents are stored off-site, they must be retrievable upon 3 business days’ notice. If the documents are stored electronically, the electronic copies must comply with various requirements that are designed to maintain the integrity of the record. These requirements are described in subdivision (d) of 13 CCR 272.02 and are discussed more specifically in the section on “Storing Documents Electronically” below.

BAR Regulations on Records Retention

The Bureau of Automotive Repair (BAR) requires automotive repair dealers to retain the following documents, either in written or electronic form:

  1. All service drive invoices.
  2. All estimates, including all records, such as emails or texts, created to obtain the customer’s authorization.
  3. All work orders, including all records supplementing the work order created to obtain additional authorization from the customer.

BAR requires the documents to be retained for three years, and they must be open for reasonable inspection and/or reproduction by BAR during normal business hours. However, CNCDA recommends that dealers retain such documents for at least four (4) years to account for statutes of limitations for most civil lawsuits.

BAR allows dealers to retain all documents electronically. However, if your dealership retains documents electronically, you must scan all the documents that include a customer’s signature. In other words, the electronic version of any document that requires a customer’s signature must contain the customer’s signature.

To learn more about records retention in the service drive, please see CNCDA’s Service Drive Compliance Manual.

No Bright-Line Test for When Records Can Be Destroyed

Many organizations have developed sample records retention policies that are largely based on IRS guidelines. Indeed, tax rules dominate most records retention discussions, sometimes leaving the incorrect impression that satisfying tax rules automatically satisfies all other records retention concerns. In reality, no dealer can safely expect to win a dispute of any kind without written proof of all important events and transactions. Records are therefore needed until all disputes for which the records are relevant become time-barred by applicable statutes of limitation (or longer under some special laws that precisely spell out the retention period.)

It is impossible to give an accurate statement as to some date or timetable after which the dealership will never have a need for a particular document or for all documents of a particular class. This is true because most records are relevant not only to one or two legal theories or claims, but to a range of issues and claims, each with a different statute of limitation length, and a different statute of limitation start-date. Furthermore, many statutes of limitation start-dates are “floating” – time only begins to run upon discovery of wrongdoing by the alleged victim.

Since identifying all of the possible legal theories that may require reference to a particular document is virtually impossible, and start-dates are not always known, records retention schedules take into account only the most likely theories and most likely start-dates.

Is Permanent Retention the Best Approach?

With the advancement of computer imaging and storage technology, the cost of retaining documents (in electronic format) has fallen dramatically. Therefore, it is increasingly feasible for dealers to retain all records permanently, “just in case.”

A downside to the permanent retention of documents is that it potentially increases a dealership’s exposure to liability in the event of a data breach. This underscores the importance of properly securing your dealership’s data. For a detailed discussion on data security, please see CNCDA’s CCPA Compliance Handbook, which is accessible on our website (www.cncda.org) under the “CNCDA Comply” tab.  

Even if you are considering retaining many documents permanently, you may want to consider a deletion schedule for e-mail, voicemail, and other highly informal communications within your dealership. Communications of this type are more akin to telephone calls than to written correspondence. As such, they should not be retained beyond the normal times needed to complete transmission. However, any message that is especially important (such as a customer’s e-mail authorization of an estimate) should be saved as a separate file or printed out at the time of its use.

Finally, dealers should also note that once a dispute arises, or is clearly on the way, the “stop” button must be pressed on the deletion of any relevant material, including e-mail, voice mail, and other computer records. Otherwise, civil claims of spoliation of evidence and criminal charges of obstruction of justice may be the unintended result. The issue of litigation “holds” is discussed in greater detail below.

Storing Documents Electronically

CNCDA often receives calls from dealers asking whether they can simply retain electronic copies of physical documents after scanning the paper originals. In most cases, the answer to this question is “yes.” However, there are a few important caveats:

  • Under current DMV regulations, documents pertaining to the purchase, sale, lease, or rental of a vehicle must be retained in physical form for at least 90 days. Generally, these documents must be maintained at the dealership’s principal place of business.
  • Dealerships should physically retain other important legal documents where wet signatures may be required. These include documents pertaining to the transfer of real property (e.g., deeds), mortgages, and real property leases.
  • As a best practice, dealers may also wish to retain physical copies of other important legal documents. These documents could include franchise agreements and vendor agreements.

The method electronic documents are stored is also critical. Documents pertaining to the purchase, sale, lease, or rental of a vehicle must be stored in a manner that complies with Title 13 Section 272.02 of the California Code of Regulations. IRS documents must be maintained electronically in accordance with Revenue Procedures 98-25 and 97-22, discussed below. Considering these requirements, dealerships should keep several issues in mind when selecting a vendor to store and manage electronic documents. These issues include:

  • Integrity. Any system should maintain accuracy, legibility, and prevent the unauthorized manipulation of documents.
  • Reliability. Any system should be highly reliable and contain redundancy (i.e., back-ups) in the unlikely event of system failure.
  • Security. Any system should employ industry-standard security measures to prevent unauthorized access to data.
  • Searchability/Indexing. Any system should be designed in a manner so that documents can be retrieved quickly and easily.

In designing a system to store documents electronically, dealers should also take note of the requirements of the California Consumer Privacy Act (CCPA). Under the CCPA, consumers (including dealership customers) have certain rights with respect to the deletion of their data, and businesses can face substantial liability in the event of an unauthorized data breach.

CAUTION

Electronic Records Retention Requirements for IRS Documents. A 2005 “Automotive Alert” issued by the IRS reminds dealers that Revenue Procedure 98-25, Electronic Records Retention Requirements, applies to all taxpayers, including dealers, with at least $10 million in assets. The procedure is designed to require large taxpayers to maintain their records in an electronic format that is capable of being retrieved, manipulated and printed for audit purposes, and contains sufficient transaction level detail. The procedure also requires the taxpayer to provide the IRS the necessary resources to process the records. This includes the hardware, software, terminal access, computer time, and personnel. If you have any questions about whether your DMS system complies with these requirements, contact your DMS provider.

NOTE

IRS Regulations On Imaged Documents: Revenue Procedure 97-22 covers the use of imaging systems to satisfy IRS recordkeeping requirements. The procedure is detailed, but its highlights include the following: The system must create accurate, highly legible and readable indexed images of hardcopy documents, able to be retrieved and printed at the time of any IRS examination by IRS personnel working on equipment provided by the taxpayer at the taxpayer’s location. The workings of the system must be documented and include reasonable written controls and testing to ensure integrity, accuracy, and reliability (one control could be the use of a non-erasable and non-rewritable media). A record of where, when, by whom, and on what equipment the image was produced must be created. The system must be able to reproduce a legible and readable hardcopy. All imaged documents that support entries on company books and financials must be readily retrievable via cross references. The IRS must be given access to the system to test it, even on a random basis, and even if there are absolutely no tax liability problems.

Confidentiality Considerations

Just as an imaging system makes it quick and easy for your staff to find and look through tens of thousands of pages, it also makes it easy for someone suing your dealership to go on a fishing expedition through all of those files: courts routinely order parties to turn over computer based information during the discovery phase of lawsuits. While relevant evidence, good or bad, should be out in the open, the sheer volume of data stored electronically makes inadvertent disclosure of irrelevant or confidential material much more likely. Consider adopting a rule that confidential materials, like communications with your attorney, be kept off the system, or at least be specially coded to prevent unauthorized access.

Retention Schedule Litigation “Hold”

When litigation, a government investigation, or other legal proceeding is anticipated, dealers must suspend their routine document retention/ destruction policy and put in place a litigation “hold” to preserve all information and documents known or even suspected of being relevant. In effect, once a litigation hold is triggered, the dealership must identify, isolate, and preserve all documents (paper or electronic) that could have any reasonable relation to the matter.

“Anticipation of litigation,” and thus the need for a litigation hold, would certainly be present if the dealership were served with a lawsuit. However, a demand letter or other notice that litigation was a real possibility could also trigger the conclusion that there is an anticipation of litigation. Legal counsel should be involved in making any determination concerning the presence or absence of anticipated litigation.

Shredding Law

Dealerships maintain mountains of consumer records that include “personal information” of consumers. When those records are thrown out, dealers are required by Civil Code section 1798.81 to destroy the records by shredding, erasing, or otherwise modifying the personal information in those records to make it unreadable or undecipherable through any means. It is important to remember this law whenever paper documents with any personal information are thrown out. It must also not be overlooked when computer hard drives are replaced or upgraded.

For purposes of this law, “personal information” means any information that identifies, relates to, describes, or is capable of being associated with, a particular individual, including, but not limited to, his or her name, signature, social security number, physical characteristics or description, address, telephone number, passport number, driver’s license or state identification card number, insurance policy number, education, employment, employment history, bank account number, credit card number, debit card number, or any other financial information.

Illustrative Records Retention Schedule

For purposes of illustration only, published materials on records retention have been reviewed, correlated, and expanded upon to provide the following downloadable list of minimum record retention times for California motor vehicle dealers. Also bear in mind that some records may fall into two or more categories. The longest retention period of any of the applicable categories will apply to those records.

Dealership Opening, Closing, and Licensing

Overview

This chapter discusses the requirements to obtain a new vehicle dealer licenser, issues faced in the closing of a dealership, and the requirements for obtaining a salesperson’s license. The salesperson licensing provisions  are intended to protect consumers and the dealers who employ vehicle salespersons.

This chapter also describes the requirements for the use of special dealer plates under the “Special Plates” regulation promulgated by the Department of Motor Vehicles (“DMV”). This regulation was adopted as a means of curbing abuses from the improper use of special plates, and includes a review of the proper and improper use of dealer plates.

Vehicle Dealer’s License and Other Permits

Dealer Licensing Requirements

A dealer is someone who:

  1. For commission, money, or other thing of value, sells, exchanges, buys, or offers for sale, negotiates or attempts to negotiate, a sale or exchange of an interest in, a vehicle subject to registration, a motorcycle, snowmobile or all-terrain vehicle subject to identification under this code, or a trailer subject to identification pursuant to section 5014.1, or induces or attempts to induce any person to buy or exchange an interest in a vehicle and, who receives or expects to receive a commission, money, brokerage fees, profit, or any other thing of value, from either the seller or purchaser of the vehicle.
  2. Is engaged wholly or in part in the business of selling vehicles or buying or taking in trade, vehicles for the purpose of resale, selling, or offering for sale, or consigned to be sold, or otherwise dealing in vehicles, whether or not the vehicles are owned by the person.

The DMV issues many different occupational licenses, including those for use by dealers for the operation of  new, used, and wholesale only businesses. Applicants for new vehicle dealer licenses are not required to take an examination as part of its application, however, applicants for a used vehicle dealer license or dealer wholesale only license must attend a dealer education program and pass an examination regarding laws regulating dealers before submitting an original certificate of completion with their DMV application. In addition to these initial licensing requirements, all used car dealers must successfully complete a continuing education program of at least 4 hours, every 2 years, in order to maintain their license. California law provides that a new motor vehicle dealer and “any employee of that dealer” are exempt from these examination and continuing education requirements.  Additionally, dealers who sell vehicles on a wholesale only basis and who in a one-year period deal with less than 50 vehicles that are subject to registration, do not have to complete the continuing education requirements.

To act as an autobroker, an applicant must be licensed as a dealer (either new or used) and obtain from the DMV an endorsement to the license authorizing the applicant to act as an autobroker (please see Chapter 4 for additional information regarding autobrokers).

To obtain a dealer license application, the applicant may either contact the DMV Occupational License Inspector in the relevant area, or simply retrieve all of the necessary forms from the DMV’s webpage at https://www.dmv.ca.gov/portal/vehicle-industry-services/occupational-licensing/occupational-licenses/vehicle-dealer-license/.

Application Procedure

The application for a new vehicle dealer license consists of many required documents, including the following DMV Occupational Licensing forms:

  • New Dealer Application Checklist (OL 248A)
  • Application for Original Occupational License, Part C (OL 12)
  • Original Application for Occupational License Part A (OL 21A)
  • One of the following Bonds:
    • Surety Bond of dealer (OL 25); or
    • Surety Bond of Motorcycle Dealer, Motorcycle Lessor-Retail, All-Terrain Vehicle Dealer, or Wholesale-Only Dealer [Less than 25 vehicles per year] (OL 25B); or
    • Cash Bond with OL 65/94; or
    • Passbook or certificate of Deposit with (OL 64/65)
  • Application for Occupational License Personal History Questionnaire, Part B (OL 29B) – required for each person listed under ownership on form OL 12, along with a copy of the individual’s driver’s license.
  • Authorization To Release Financial Information (OL 53).
  • Certificate of Proposed Franchise (OL 124) – completed by the manufacturer for new automobile, commercial, motorcycle, all-terrain vehicle, motorhome, and recreational trailer dealers only and required for each make.
  • Property Use Verification for Vehicle Dealers’ License (OL 902) – completed by a city official where the dealership is located.  The DMV has relaxed some of its requirements and may not require this form on each application.  An applicant should check with the local DMV Occupational Licensing inspector to see if this form will be required.
  • Appointment of Director as Agent for Service of Process (ADM 9050) – required for each person listed on form OL 12.  This form must be either notarized or witnessed by a DMV/CHP Officer.
  • Fingerprint Card (ADM 1316) – required for out-of-state applicants only.
  • Request for Live Scan Service (DMV 8016) – required for each person that completes form OL 29B. For out of state applicants, call the Occupational Licensing Unit at (916) 229-3126 or the local DMV inspector to obtain a fingerprint card (ADM 1316).  The request for the Exemption from Mandatory Electronic Fingerprint Submission Requirement form (BCII 9004) can be obtained at https://oag.ca.gov/sites/all/files/pdfs/fingerprints/bcii9004.pdf.

All of the occupational licensing application forms referred to above, as well as a Used Dealer, Dealer-Wholesaler Only, and Autobroker Application Checklist (OL 248B), are available on the DMV website at https://www.dmv.ca.gov/portal/uploads/2020/06/ol248b.pdf.

Fees

DMV charges the following fees for an application:

  • $176 for an original application (includes the $1 Family Support Program fee).
  • Fingerprint Livescan fee varies depending on location, plus $32 for Department of Justice record check fee and an additional FBI record check fee.
  • $70 for each branch office.
  • $100 for the autobroker endorsement.
  • $71 for each dealer plate requested and $73 for each motorcycle plate (these fees may vary by county – please contact a DMV Occupational Licensing Inspector to find out the exact amount for the relevant location).
  • $300 New Motor Vehicle Board Fee.

Site Inspection

Besides completing the application form and submitting the required fees, an applicant must arrange to have an inspection of the dealership conducted by a DMV Occupational Licensing Inspector. The inspection should be scheduled well enough in advance to avoid delays in beginning business activities. The inspection will cover the following requirements:

Office – The place actually occupied by the dealer where business is conducted. All books and records pertinent to the business must be maintained at the office.

Display Area –The display area must be of sufficient size to physically accommodate vehicles of the type the dealership is licensed to sell. Additional display areas are permitted within a radius of 1,000 feet from the principal place of business and any licensed branch location without being subject to separate licensing.

Sign –Dealers must display signs to enable any person doing business with the dealer to identify him or her properly. Signs must have an area of not less than two square feet per side displayed and must contain lettering of sufficient size to enable the sign to be read from a distance of at least 50 feet.

Other Documents Required to Process Dealer License Application

In addition to the DMV forms listed above, the DMV requires copies of the following documents to be submitted along with a dealer license application. Further details are discussed below.

  • A copy of the applicant’s California Department of Tax and Fee Administration(formerly the California State Board of Equalization) Resale Permit (commonly referred to as the “seller’s permit”.)  The seller’s permit must list the exact legal name and dba name for the dealership, as well as the dealer’s address listed as shown on the DMV license application.
  • A copy of the applicant’s city or county business license where the dealership will operate.
  • A copy of your fictitious name statement (recorded and published in the county where the dealership will operate).
  • If the dealership property is leased, a copy of the applicant’s signed lease agreement.
  • Corporation, Limited Liability Company or Limited Liability Partnership owned businesses will need to provide a copy of the Articles of Incorporation or Articles of Organization, Corporate Minutes, and the Statement of Information filed with the Secretary of State, which identifies the officers, shareholders, and/or managers with an interest in the business.
  • Photographs of the proposed dealership location. For information on the specific photograph requirements, see: www.dmv.ca.gov/portal/dmv/?1dmy&urile=wcm:path:/dmv_content_en/dmv/vehindustry/ol/photoreq 

Live Scan

Anyone applying for the first time to be licensed by the DMV Occupational Licensing Branch is required to submit digitized fingerprints through Live Scan rather than hard copy fingerprint cards. Typically, results may be obtained within 3 days. If the applicant does not receive his or her results within two weeks, you can check the status at  https://applicantstatus.doj.ca.gov by using the ten digit Applicant Tracking Identifier given by the Live Scan provider. If fingerprint cards are used for out of state applicants, then results may not be available for 10-12 days, and sometimes up to 60 days.

Applicants can visit the DMV website to find  the location of a Live Scan site, the Live Scan form, and further instructions at: https://www.dmv.ca.gov/portal/vehicle-industry-services/occupational-licensing/live-scan-fingerprinting/.

Dealer Bond

The Vehicle Code requires that every dealer applicant procure and file with the DMV a dealer bond in the amount of $50,000, except that the bond of a dealer who deals exclusively in motorcycles or ATVs shall be in the amount of $10,000, executed by an admitted surety insurer prior to the issuance or renewal of a dealer’s license.  Liability under the bond is to remain at full value at all times and must be restored to the full $50,000 amount ($10,000 for motorcycle and ATV dealers) if liability under the bond is decreased pursuant to a final court judgment or for any other reason.  In addition to persons suffering loss or damage as a result of the fraudulent representations by the dealer or the dealer’s salespersons or resulting from other non-compliance by the dealer with the registration and other requirements contained in Division 3 of the Vehicle Code, a dealer who has not paid for a vehicle sold to another dealer may also have a right of action against the purchasing dealer and the surety listed on the dealer’s bond in an amount not to exceed the value of the vehicle.  

However, under a California Attorney General Opinion, “a finance company does not have a statutory right of action against a surety on a dealer’s bond when the dealer defaults on his or her loan from the finance company for the purchase of a vehicle at an auction.”  

CAUTION

Regarding A Dealer Letting Someone Else Use The Dealer’s Name, Books, Or Records: Dealers should not allow non-employees of the dealership the use the dealer’s DMV supplies or dealer number. California law provides that it is unlawful for a dealer to permit the use of the dealer’s license, supplies, or books by any other person for the purpose of permitting that person to engage in the purchase or sale of vehicles or permit the use of the dealer’s license, supplies, or books to operate a branch location. In a prior California court case the court upheld the revocation of a dealer’s license because the dealer allowed another individual to engage in the buying and selling of vehicles on the dealer’s premises, with the dealer receiving a share of the profits from the vehicle sales. In upholding the administrative judge’s decision that the dealer’s license should be revoked, the court found that the dealer had wholly abandoned his books and allowed this other individual to operate under the dealer’s license without any contact, involvement or follow-up on the part of the dealer.

Useful Information on DMV Website

The DMV has the following useful information on its website which can be used in the dealer licensing process and in the operation of a dealer’s business:

How to Complete an Application for a Dealer License at: https://www.dmv.ca.gov/portal/vehicle-industry-services/occupational-licensing/occupational-licenses/vehicle-dealer-license/. This link goes through all the steps and forms for obtaining a dealer license.

How to Apply for Lessor-Retailer License at: https://www.dmv.ca.gov/portal/vehicle-industry-services/occupational-licensing/occupational-licenses/vehicle-lessor-retailer-license/.   

This 12-page publication is a general guide for dealers in operating a dealership.

Vehicle Industry Procedures Manual at: https://www.dmv.ca.gov/portal/handbook/vehicle-industry-registration-procedures-manual-2/ which is the DMV’s 30 chapter registration procedures manual.

Vehicle Industry News at: https://www.dmv.ca.gov/portal/vehicle-industry-services/vehicle-industry-news-memos/. This provides dealer industry news from the DMV. Dealers may also subscribe for email alerts from the DMV.

Occupational License Status Information System at: www.dmv.ca.gov/portal/dmv/detail/portal/olinq2/welcome, provides the ability to check the status of any dealer’s license.

DMV Occupational Licensing Information at: https://www.dmv.ca.gov/portal/vehicle-industry-services/occupational-licensing/request-for-information/ with links to publications, tables, forms, online services, quick links to the Vehicle Code and other sources of information, and programs.

Occupational Licensing Forms at: https://www.dmv.ca.gov/portal/forms/?formfilter=385&q=#forms-filter-bar.

Other Dealer License and Permit Requirements

In addition to the requirements specified above, there are numerous other local, state, and federal permits and licenses that an applicant will need to obtain before the applicant can open for business. The following list identifies many of these additional requirements.

For information regarding how to contact the appropriate agencies in the applicant’s area, log-on to the California EPA’s Internet Web site at www.calgold.ca.gov. Known as CalGold (California Government: On-line to Desktops), this Web site is intended to be a one-stop clearinghouse for permit information.

1. Seller’s Permit

The applicant must obtain a seller’s permit from the California Department of Tax and Fee Administration (formerly the State Board of Equalization) authorizing the applicant to collect sales tax. An application can be obtained from the nearest CDTFA office, or the applicant can register online at the CDTFA website at www.cdtfa.ca.gov/services/permits-licenses.htm. There is no fee for a seller’s permit.

2. Auto Repair Dealer Registration and Smog Check License

The applicant must obtain an auto repair dealer registration from the Bureau of Automotive Repair ($200 fee). In order to perform smog inspections, the applicant must obtain a Smog Check station license ($100 fee). Dealers may receive warnings from the Bureau of Automotive Repair (BAR) for performing smog check repairs without possessing the necessary Smog Check station license. A separate license is also required for lamp and brake stations, brake adjusters, and muffler stations ($10). Applications can be obtained from the Bureau or can be downloaded from the Bureau’s Web site at: www.bar.ca.gov/Industry/Getting_Licensed.aspx.

It is unlawful for any person to perform a smog check test or related smog check repairs unless the person performing the test or repair is a qualified smog check technician and the test or repair is performed at a licensed smog check station. BAR officials have previously advised that a smog check station license is not required if a dealership is performing emission-related repairs unrelated to a smog test. For example, if a customer visits a dealership because the “check engine light” is illuminated and resulting emission repairs are performed, no smog station license is required. However, if a customer visits the service department and advises the dealer that their vehicle has failed a smog test and requests repairs necessary to pass a re-test, the dealership may not perform the repairs unless licensed as a smog check station, even if the repairs are covered under the manufacturer’s warranty.

In the past, there has been some confusion as to whether or not limited liability companies may operate automotive repair shops. A published opinion by the California Attorney General has cleared up this issue by stating that limited liability companies may operate automotive repair shops, and as a result, the BAR has developed a separate application for LLCs to apply for a repair dealer registration.  A copy of the application for an LLC can be found at: www.bar.ca.gov/pdf/ARD_Reg_LLC_App-FRM.pdf.

3. Insurance License

For information regarding insurance licensing, please see Chapter 3.

4. Federal Employer Identification Number

The applicant must obtain a Federal Employer Identification Number (EIN) from the IRS. For more information, see IRS Form SS-4, or go to the IRS’ website at www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online.

5. U.S. Environmental Protection Agency (ID Number)

A federal EPA number must be obtained by any business that generates, transports, or offers for transport, treats, stores or disposes of hazardous waste. Depending upon the type and amount of hazardous waste generated, a business may qualify as a “conditionally exempt small quantity generator,” thus exempting it from the requirement that it obtain a federal EPA number. The business will most likely be required to obtain a California EPA number instead. To find out if a business qualifies as a conditionally exempt small quantity generator, the applicant should contact the California Department of Toxic Substances Control, or visit dtsc.ca.gov/apply-for-hazardous-waste-epa-id-number.

6. California Employment Development Department

The applicant is required to file an employer registration form within 15 days after paying more than $100 in wages to one or more employees. No distinction is made between full-time and part-time or permanent and temporary employees in meeting this requirement.  Information on how to apply online for an EDD number application can be found at: www.edd.ca.gov/About_EDD/Employer_Services_Online.htm.

7. Hazardous Materials Storage Permit

Such a permit is usually required of all facilities that store on-site bulk quantities of hazardous materials, such as motor oil and antifreeze, and is generally issued by the city or county, either of which may be designated as the Certified Unified Program Agency (CUPA) for the applicant’s area.

8. Hazardous Waste Storage Permit

Such a permit is usually required of all facilities that generate or store hazardous waste, such as waste oil and waste antifreeze, and is generally issued by the city or county’s CUPA.

9. Underground Storage Tank Permit

Such a permit is usually required to be obtained by the owner of an underground storage tank, and is generally issued by the city or county’s CUPA.

10. Air Quality Management District or Air Pollution Control District Permit

The applicant may need to obtain a permit to construct or permit to operate certain equipment, including paint spray booths, from the applicant’s local AQMD or APCD.

11. Industrial Wastewater Discharge Permit

The applicant’s local sanitary sewer district may require a permit to discharge industrial wastewater into the sanitary sewer system.

12. Certified Oil Recycling Center Certification (Voluntary)

The applicant’s may voluntarily elect to become certified by the California Integrated Waste Management Board as an oil recycling center. Certification may enable the applicant to receive payment from the State for used oil sent to recycling.

13. Flammable Liquid Storage Permit

The applicant’s city or county fire department may require a permit to store or use flammable liquids. Some fire departments may also require a facility inspection.

14. Freon Recycling Permit

Some cities issue permits to perform air conditioning service involving Freon recovery. Permit requirements include the use of Freon recovery units approved by the U.S. EPA and certification of technicians who perform these services.

15. Air Compressor Tank Permit

Air compressor tanks (pressure vessels) must by permitted by Cal-OSHA’s Pressure Vessel Unit or an authorized inspector.

16. Land Use Permit/Zoning Clearance

A permit or clearance may be required by the applicant’s city or county.

17. Public Safety Inspection

City police, county sheriffs or fire departments may offer business crime prevention programs, and may require certain permits, such as burglar or fire alarm permits.

License Denial

Grounds for Denial of New Car Dealer’s License

An applicant for a new car dealer’s license must submit its application to the DMV on forms prescribed by the DMV providing information as to the applicant’s character, honesty, integrity and reputation. The DMV must within one-hundred and twenty (120) days make a thorough investigation of the information contained in the application, and the DMV for reasonable cause shown may refuse to issue a license.

Most applicants for a new car dealer’s license are corporations and limited liability companies, and perhaps the most common ground for denial of a license is that the owners, directors, officers and managerial employees of the corporate applicant have held similar positions with a corporate dealership whose license has been revoked for cause and never reissued, or more commonly, has been suspended and the terms of the suspension have not been fulfilled. Under these circumstances, the DMV may refuse to issue a license.

It is not uncommon that the owners of a dealership which has, for example, been placed on probation for a one or two year period as the result of an accusation decide that they wish to acquire another dealership and form a new corporation to acquire its assets. Their application for a license to operate the new store will necessarily reflect that they are the owners of a dealership which is presently operating with a probationary license. Depending upon the seriousness of the violations which gave rise to the issuance of the probationary license and the balance of the term of probation, the DMV may refuse to issue the new license, or insist that any new license be issued subject to the same terms of probation as those under which the existing dealership is operat­ing, or the DMV may issue the new license without restrictions.

The filing of incorrect information in the application may result in a refusal to issue a license.  Where it is apparent that the applicant intentionally filed an application with false information, the likelihood of getting a license is extremely remote. Even where the application reveals that representatives of the applicant have had some prior disciplinary problems with the DMV or have even been convicted of a felony, there is at least an opportunity open to the applicant to demonstrate at a hearing that these problems are in the past and it is still possible that a license will be issued; however, if this type of information is deliberately concealed, there may be no chance of getting a license. Needless to say, the prior conviction of a felony or a crime involving moral turpitude on the part of an applicant or one of its representatives is grounds for refusal to issue a license.

If any of the causes that would allow the DMV to file an accusation against the license of a dealer exist against the applicant, including its owners, directors, officers and managerial employees, the applicant may be refused a license. Finally, if an unsatisfied judgment exists against the applicant and/or its representatives arising out of the purchase, sale or lease of any vehicle, a license may be denied.

If an applicant has been denied a dealer’s license how long must the applicant wait to reapply for a license?

This depends upon the reason for the denial. Generally, an applicant must wait one year from the effective date of the decision denying the application. However, if the reason for the denial is something that can be cleared up sooner, the applicant may resubmit an application at any time accompanied by evidence that the grounds for denial no longer exist.  For example, if the reason for the refusal related to one of the owners, directors, officers or managerial employees of the applicant, a new application may be submitted with evidence that such individual no longer occupies such a position with the applicant or that terms of probation with respect to such individual have now been satisfied. If the reason is an unsatisfied judgment, a new application may be submitted with proof that the judgment has been satisfied.

Right of ­Applicant to a Hearing upon Refusal to Issue a License

Just as a dealer cannot have his or her license revoked or suspended without a hearing, an applicant for a new car dealer’s license must be afforded a hearing if the applicant desires to contest the denial.

Once the DMV has decided to deny an application for a dealer’s license, the applicant is informed in writing of the decision and of a right to demand a hearing. The applicant may make a written demand for a hearing within sixty (60) days from notice of the denial.  In response to such a demand, the DMV is required to serve upon the applicant a verified “Statement of Issues,” which is similar in form to an accusation, and specifies the reasons for the denial. The Statement of Issues is accompanied by a Notice of Hearing, and either a statement informing the applicant of the right to discovery or copies of the applicable Government Code sections relating to discovery. A Notice of Defense is also served, which the applicant must sign and timely file in order to be given the opportunity to proceed with a hearing.

From this point forward, the procedures are the same as those relating to accusations, including the right to appeal an unfavorable decision to the New Motor Vehicle Board.

CAUTION

Regarding Contesting License Denials: Careful consideration should be given by an applicant as to whether to contest a refusal to issue a license since the one year an applicant may be required to wait before reapplying for a license does not begin to run until the effective date of the decision denying the application. If the refusal is unsuccessfully contested, the effective date of the decision will be delayed until the conclusion of the hearing process which may be as long as an additional six to nine months. Also, where a decision not to contest the refusal is made, it is recommended that the DMV be notified that there will be no contest so that there is no chance that the effective date of its decision will be postponed.

Closing a Dealership

There are many issues to consider in closing a dealership. Although this is not an exhaustive discussion, below are some of the issues to consider.

Factory Buy-Back Obligations

California law specifies the minimum termination assistance that a manufacturer/distributor must provide to a dealership, and further provides that it is unlawful for the factory to fail to pay to a dealer, within 90 days of termination, cancellation, or nonrenewal of a franchise, all of the following:

Vehicle Inventory. The dealer cost, plus any charges made by the manufacturer or distributor for vehicle distribution or delivery and the cost of any dealer-installed original equipment accessories, less any amount invoiced to the vehicle and paid by the manufacturer or distributor to the dealer, for all new and undamaged vehicles with less than 500 miles in the dealer’s inventory that were acquired by the dealer from the manufacturer, distributor, or another new motor vehicle dealer franchised to sell vehicles of the same line-make, in the ordinary course of business, within 18 months of termination, cancellation, or nonrenewal of the franchise.

Parts and Accessories. The dealer cost for all unused and undamaged supplies, parts, and accessories listed in the manufacturer’s current parts catalog and in their original packaging, except that sheet metal may be packaged in a comparable substitute for the original package.

Signs. The fair market value of each undamaged sign owned by the motor vehicle dealer and bearing a common name, trade name, or trademark of the manufacturer or distributor if acquisition of the sign was required or made a condition of participation in an incentive program by the manufacturer or distributor.

Special Tools. The fair market value of all special tools, computer systems, and equipment that were required or made a condition of participation in an incentive program by the manufacturer or distributor that are in usable condition, excluding normal wear and tear.

Shipping and Handling. The dealer costs of handling, packing, loading, and transporting any items or inventory for repurchase by the manufacturer or distributor.

No Application To Sale of Dealership. The factory buyback provisions do not apply to the sale of substantially all of the inventory and fixed assets or stock of a franchised dealership if the dealership continues to operate as a franchisee of the same line-make.

Preserving Rights

Almost all dealer sales and service (franchise) agreements allow the dealer to terminate at will. However, before giving notice of termination, an analysis of preserving certain rights upon termination is recommended. For example, a dealer will not want the termination notice to cancel dealer rights under the dealer agreement to submit and be paid for warranty and incentive claims right up to the date of termination (a dealer should be certain to know how and when the dealer will receive payments that arrive after termination of the franchise). Most franchise agreements have provisions for an immediate termination upon the occurrence of certain events, such as no longer having a DMV license. Further, a dealer should not sign a general release in favor of the factory without having an attorney review it.

The law gives dealers indemnification rights against the factory and covers dealers whose franchise has terminated.  It provides that it is unlawful for the factory to:

  1. Fail, upon demand, to indemnify any existing or former franchisee and the franchisee’s successors and assigns from any and all damages sustained and attorney’s fees and other expenses reasonably incurred by the franchisee that result from or relate to any claim made or asserted by a third party against the franchisee to the extent the claim results from any of the following:
    1. The condition, characteristics, manufacture, assembly, or design of any vehicle, parts, accessories, tools, or equipment, or the selection or combination of parts or components manufactured or distributed by the manufacturer or distributor.
    2. Service systems, procedures, or methods the franchisor required or recommended the franchisee to use if the franchisee properly uses the system, procedure, or method.
    3. Improper use or disclosure by a manufacturer or distributor of nonpublic personal information obtained from a franchisee concerning any consumer, customer, or employee of the franchisee.
    4. Any act or omission of the manufacturer or distributor for which the franchisee would have a claim for contribution or indemnity under applicable law or under the franchise, irrespective of and without regard to any prior termination or expiration of the franchise.

Other Agreements with Manufacturer

Even if the franchise agreement can be terminated by the dealer at will, this does not necessarily mean that the dealer or its shareholder(s) can just as easily terminate other agreements with the manufacturer, such as site control agreements, or equipment leases. Before making the final decision to terminate the franchise and close the dealership, a dealer should review all incidental agreements to be sure they can also be terminated and, if they cannot, the dealer should seek the factory’s agreement to terminate them.

Vendor Contracts

Typically a dealership has a substantial number of vendor contracts, such as computer leases and maintenance agreements, uniform supply contracts, and the like. A dealer closing a dealership should attempt to have the vendors cancel all such contracts upon termination of the franchise. If this is not handled properly, the dealer could be faced with making payments on vendor contracts for a long time. Additionally, the dealer principals may have personally guaranteed some of the vendor contracts, thereby putting them at risk for a possible collection action by the vendor.

Retail Finance Dealer Agreements, Service Contracts, Dealer Warranties

A dealer should plan in advance exactly what will happen under all of the dealer’s retail finance agreements and service contract agreements when the dealership closes. For example, a dealer should determine if a finance company will pay the dealer a fixed percentage of the dealer’s reserve account immediately upon closure, or will the dealer be required to wait until maturity to receive any remaining reserve a dealer. A dealer should determine if there a program for “buying out” the right of the lender to pursue any charge-backs against the dealer and/or its principals. If the dealership has obligations to consumers to perform used vehicle “Dealer Warranty” repairs, the dealer should secure the services of an established dealer or repair shop to provide those services.

DMV and Related Licensing Matters

Whether a dealer closes the doors entirely or simply give up a franchise and operate as a used vehicle dealership, the dealer must notify DMV and surrender the dealer’s new vehicle report of sale documents and dealer plates. The California Department of Tax and Fee Administration must be notified in either case, as well. If the dealer is closing the service department, the dealer will need to notify the BAR and arrange for the surrender of the dealer’s ARD registration. A closure of the entire operation will also have to be noted on the dealer’s Employment Development Department reports and tax returns.

Records Retention

Closing the dealership does not relieve the dealer of the obligation to retain records and to maintain the safety and security of those records in accordance with applicable law, such as the GLB Safeguards Rule. The dealer may, however, arrange for storage of the records at a new location or contract with a third party to retain and safeguard the records on the dealer’s behalf. Even if a dealer dissolves the dealership’s corporation or other corporate entity, the dealer needs to plan for the for appointment of a dissolution trustee or other person to act for the dissolved corporation for purposes of records retention. See Chapter 13 of this Guide, Records Retention.

Insurance Considerations

A key aspect in planning for the closure of a dealership is the evaluation of post-closure insurance coverage available to the dealership and its principals. A dealer should ensure that steps are taken, for example obtaining any endorsements for extended reporting periods relating to the termination of the business operations, to retain insurance coverage for claims that may surface in the future alleging wrongdoing by the dealership and/or its principals. A dealer should confirm with the dealer’s insurance broker that insurance coverage will be available for the owners after a dealership entity has dissolved for claims such as negligent repair when  a vehicle the dealership repaired burns up years after the dealership has closed. For business property insurance, a dealer should be sure to obtain the proper endorsements to avoid having coverage denied based upon the dealership’s facility being deemed “abandoned” or “unoccupied.” In addition, it is advisable for a dealer to discuss with the dealer’s insurance company or broker the ending date for various company insurance coverages, such as Workers Compensation, to cut off further premiums.

Business Entity Dissolution

It is beyond the scope of this discussion to detail the business entity dissolution process. If, for example, you are dissolving a corporation, California has very specific statutes on the dissolution process. Liability can be imposed on directors and shareholders for improper distributions of corporate assets, and a dealer should seek an attorney’s guidance through the dissolutions process.

Employee Issues and Federal and State WARN ACT Requirements

Under both federal and state law, the WARN Act requirements are meant to provide employees, the unions (if applicable) and government officials advance notice of an impending loss of employment for mass layoffs or closures. If a WARN Act notice is triggered under federal or California law, then employees must be given 60 days advance notice of the loss of employment. A notice must also be sent to the California Employment Development Department, the Local Workforce Investment Board, and the chief elected official of each city and county government where the termination occurs. Under federal law, the WARN act applies to employers with 100 or more employees; whereas the California WARN Act applies to employers with 75 or more employees.  Generally speaking, a WARN Act notice is triggered if there will be a “mass layoff”. A “mass layoff” under federal law means a workforce reduction of at least 500 employees or 33% of the total employees who comprise at least 50 employees at the work site (part-time employees being excluded from these calculations).  Under California law, “mass layoff” means a workforce reduction of at least 50 employees during any 30-day period due to lack of work or lack of funds.

The calculations required under the WARN Act statutes are sometimes complicated, even more so when there are affiliated entities involved. Dealers should have their attorneys guide them through this process.

There are a number of other employee liabilities, such as pension funds, payroll taxes, and health insurance matters (including various notices when medical insurance terminates). These issues must be addressed to avoid personal liability of the owners of the business. Discharged employees must receive their final paycheck with all outstanding compensation owed and vacation time accrued. Discharged employees must also be provided with an EDD notice which describes the employee’s rights regarding filing for unemployment.

Unfunded Liability if Dealership Pays Contributions to Union Pension Fund

A dealership may have liability for contributions to a pension plan when the plan is underfunded. Some union pension funds have seen dramatic losses contributing to the unfunded liability. When dealerships sell, decrease its personnel significantly, or close their operations, they may be liable (in the millions of dollars in pension liability). Because the rules are so complicated and vary depending upon the dealership, it is recommended that dealerships seek competent legal advice on this subject prior to executing any planned closing of the dealership.

COBRA

In closing a dealership, it is important to consider outstanding COBRA health care continuation coverage liability for existing COBRA participants as well as for employees terminated as a result of the closing. Although a single point dealership should be able to terminate its health benefit plan entirely, and thus avoid further liability under COBRA, accomplishing such a termination is a complex matter and should be undertaken with the assistance of expert advisers. Additionally, dealer groups that close one of many dealerships will in many cases be unable to terminate the entire health benefit plan and may, under applicable law, be required to provide COBRA coverage to the employees of the closed dealership. Again, the assistance of knowledgeable advisors in this area is essential.

Permits and Taxes

A dealership has various permits and files a number of tax returns. See the discussion earlier in this chapter, Other Dealer License and Permit Requirements. The issuer of each permit held by the dealership should be notified of the closing with a request for the issuer’s forms and procedures for terminating the permit. Personal liability can attach to the owner for various taxes and permit fees. For example, for personal liability for unpaid sales taxes, see the Sales Tax chapter 14 of this Guide, Responsible Persons for Sales and Use Tax Liability. Some agencies will have information on their website for the procedures to terminate a permit, such as the CDTFA discussion, Closing Out Your Account, at www.cdtfa.ca.gov/formspubs/pub74.pdf. The CDTFA, Employment Development Department, and Franchise Tax Board have procedures for obtaining tax clearances to show that no further taxes are owed. In addition, the closing dealership should notify the county tax collector that the dealership will no longer be paying personal property taxes.

The dealership should obtain advice from its accountant with regard to tax matters, such as the filing of final returns, possible LIFO issues, and planning to take the best advantage of business and carryforward losses.

Utility Companies

Notify utility companies of the date when utilities will no longer be needed, such as water, power, telephone, gas, and the like.

Obtaining a Salesperson’s License

Who Needs A Salesperson’s License?

Persons involved in one or a combination of the following activities must obtain a vehicle salesperson license:

  • Is employed as a salesperson by a dealer, or who, under any form of contract, agreement, or arrangement with a dealer, for commission, money, profit, or other thing of value, sells, exchanges, buys, or offers for sale, negotiates, or attempts to negotiate, a sale, or exchange of an interest in a vehicle required to be registered in this state.
  • Induces or attempts to induce any person to buy or exchange an interest in a vehicle required to be registered, and who receives or expects to receive a commission, money, brokerage fees, profit, or any other thing of value, from either the seller or purchaser of the vehicle.
  • Exercises managerial control over the business of a licensed vehicle dealer or supervises vehicle salespersons employed by a licensed dealer, whether compensated by salary or commission, including, but not limited to, any person who is employed by the dealer as a general manager, assistant general manager, or sales manager, or any employee of a licensed vehicle dealer who negotiates with or induces a customer to enter into a security agreement or purchase agreement or purchase order for the sale of a vehicle on behalf of the licensed vehicle dealer.  

The Vehicle Code does allow certain exemptions from the salesperson’s licensing requirement, including persons licensed as a vehicle dealer doing business as a sole proprietorship, a member of a partnership, a stockholder and director of a corporation, or a member and manager of a limited liability company licensed as a vehicle dealer. However, those persons shall engage in the activities of a salesperson exclusively on behalf of their corresponding entities.

Questions often arise relating to the licensing requirements for a finance and insurance manager (“finance manager”). Because a finance manager is also usually involved with the sale of accessories in connection with the vehicle purchase and is therefore a participant in the negotiation process with the buyer, the DMV has taken the position that a finance manager must have a salesperson’s license.

California law specifically provides that “[i]t shall be unlawful for any person to act as a vehicle salesperson without having first procured a license or temporary permit issued by the department or when that license or temporary permit issued by the department has been canceled, suspended, revoked, or invalidated or has expired.”

Bird Dog and Referral Fees

Dealers frequently ask about whether they can pay cash or offer other incentives (commonly known as bird dog or referral fees) to the local barber, high school, customers, or other dealers in return for referrals to new customers who visit, purchase, or lease a vehicle from the dealership. While doing so seems innocuous (and is allowed in many other states), California law specifically forbids such payments by various statutes that prohibit the activity.

A “vehicle salesperson” is defined in part as a person who “Induces or attempts to induce any person to buy or exchange an interest in a vehicle required to be registered, and who receives or expects to receive a commission, money, brokerage fees, profit, or any other thing of value, from either the seller or purchaser of the vehicle.”  There are some exceptions to the salesperson definition for insurance companies, private party sellers, and automakers, but no exception exists for members of the general public, or other licensed dealers, who refer a customer to a dealer in return for payment. In essence, California law considers that dealers who provide payment in the form of cash, future discounts, or even oil changes to a person who refers a customer are effectively employing a salesperson, and must follow the salesperson licensing requirements.

Dealers are prohibited from employing “any person as a salesperson who has not been licensed . . . .”  Because of the broad definition of “salesperson,” paying bird dog or referral fees can be considered as employing an unlicensed salesperson. This has been confirmed by senior DMV officials. It is also unlawful for any person to act as a vehicle salesperson without having obtained a salesperson license.  By paying unlawful bird dog or referral fees, a dealer could also be considered as aiding and abetting a violation of these laws.  The Vehicle Code designates these violations as criminal misdemeanors, which can lead to criminal charges, fines, probation, and administrative action up to and including revocation of a dealer’s license.  

The Automobile Sales Finance Act states that it is unlawful for any seller to induce or attempt to induce any person to enter into a contract subject to the Act by offering a rebate, discount, commission, or other consideration, contingent upon the happening of a future event, on the condition that the buyer either sells, or gives information or assistance for the purpose of leading to a sale by the seller of, the same or related goods.  Dealers should thus avoid providing a special price, accessory, or other benefit to customers based on the customer sending business to the dealer.

There is no statutory law governing the brokering of leases, but it appears that the brokering of leases is quite common in the automobile dealer industry.  When the leasing dealer pays a broker fee to the lease broker, whether or not the lease broker is licensed as a dealer by the DMV, a court or regulatory agency could find that the payment is an unlawful “bird dog fee” because the lease broker would be unlawfully acting as a salesperson for the leasing dealer.  Additionally, a strong argument can be made that a lease broker cannot advertise vehicles for lease which are not actually for sale or lease at the lease broker’s premises.

Dealers should remember that “Brokering” is an arrangement under which a dealer, for a fee or other consideration, regardless of the form or time of payment, provides or offers to provide the service of arranging, negotiating, assisting, or effectuating the purchase of a new or used motor vehicle, not owned by the dealer, for another or others.”  If anyone falls within this definition, including licensed dealers, all of California’s autobroker rules apply.  See the Autobrokers chapter in this Guide for a full discussion of the autobroker rules.

Application Forms

An application for a vehicle salesperson license consists of:

  • An Application for Occupational License Form OL16S available through the DMV website at https://www.dmv.ca.gov/portal/uploads/2020/11/OL16s.pdf.
  • DMV 8016, Request for Live Scan Clearance (a copy of the receipt showing that it was completed).
  • If applicable, to expedite the application, a copy of the arresting agency report for a prior criminal conviction and a certified copy of the court documents should be submitted along with the OL16S.
  • A $51 non-refundable application fee.

Temporary Permit

Upon filing an application, along with the payment of the required fees, and if the applicant has not had any convictions within the past 10 years, a temporary permit will be issued, which will allow the applicant to work as a vehicle salesperson for up to 120 days while the DMV is completing its investigation. The temporary permit shall become invalid when canceled or when the DMV issues, or refuses to issue, a permanent license. If the DMV determines to its satisfaction that the temporary permit was issued upon a fraudulent application or determines or has reasonable cause to believe that the application is incorrect or incomplete, or that the temporary permit was issued in error, the DMV may immediately cancel the temporary permit.  

For those applicants who have any convictions(s) during the past 10 years, no temporary permit will be issued. Instead, the application will be forwarded to DMV headquarters in Sacramento for review. Such applications will be given priority review and the applicant notified by mail whether a license will or will not be issued.

NOTE

On Failure To Disclose: The failure of an applicant to disclose in the application any conviction, whether a felony or misdemeanor, but excluding traffic offenses, which occurred within the last 10 years will result in the cancellation of any temporary permit which may be issued, and generally results in the refusal of a vehicle salesperson license.

Term of License, Renewal and Duplicate

Every original vehicle salesperson license issued, and every such license renewed, is valid for a period of 3 years from the date of issuance unless cancelled, suspended, or revoked by the DMV. Renewal of a license must be made prior to the expiration date and may be renewed by mail if the license was not renewed by mail for the immediately preceding 3 year period. A salesperson must obtain a duplicate license when the original is lost, stolen or mutilated.  Whenever the DMV cancels, suspends, or revokes a license, the licensee or person in possession of it must immediately return the license to the DMV.

Display of License and/or Temporary Permit

Every vehicle salesperson must, at the time of his or her employment, deliver to his or her employing dealer his or her salesperson’s license or temporary permit to be posted in a place conspicuous to the public on the premises where he or she is actually engaged in the selling of vehicles for the employing dealer.  It is the dealership’s duty to display the license or a true and exact copy of the license conspicuously and continuously during the employment, and if a vehicle salesperson’s employment is terminated,  the original license must be returned to the salesperson. It is the responsibility of each licensed salesperson to report in writing to the DMV every change of residence address within 5 days of the change.

Loss of License Privileges

Grounds for the Refusal to Issue, or to Suspend or Revoke a License

There are several grounds upon which the DMV may refuse to issue or may suspend or revoke a vehicle salesperson license. These grounds include the following:

  1. Failure to satisfy an outstanding court judgment rendered in connection with a licensed activity.
  2. Failure by an applicant or a licensee to pay funds or turn over property received in the course of employment, or surrender possession of any vehicle upon termination of employment, to a dealer entitled thereto.
  3. Acting as a dealer by purchasing or selling any vehicle using the license, report of sale books, or other supplies of the dealer when not acting on behalf of a dealer.
  4. Acting as a dealer by purchasing or selling vehicles while employed by a licensed dealer without reporting that fact to the dealer or without utilizing the dealer’s report of sale documents.
  5. Acting as a salesperson without having obtained a license.
  6. Improper oversight as a dealer’s managerial employee, of a person whose wrongful acts resulted in the suspension or revocation of the dealer’s license.
  7. Acting as a vehicle salesperson for more than one licensed dealer where the businesses do not have common controlling ownership. However, a vehicle salesperson may work at more than one location of a licensed dealer if the business of that dealer has common controlling ownership. Dealers have common controlling ownership when more than 50 percent of the ownership interest in each dealer are held by the same person or persons, either directly or through one or more wholly owned subsidiary entities.

Criminal Conduct

The DMV may also have cause to refuse, suspend or revoke a license if any of the provisions of Vehicle Code sections 11302 to 11909, inclusive, are triggered. This provides the basis for the denial, suspension or revocation of a vehicle salesperson license if the applicant or licensee has been convicted of a crime or committed any act or engaged in any conduct involving moral turpitude which is substantially related to the qualifications, functions or duties of the licensed activity.  Moral turpitude has been defined by the courts as “an act of baseness, vileness, or depravity in the private and social duties which a man owes to his fellowmen, or to society in general, contrary to the accepted and customary rule of right and duty between man and man”,  and has also been described as any crime or misconduct committed without excuse, or any “dishonest or immoral” act not necessarily a crime.

A crucial element for the courts has been determining if the “crime of moral turpitude” in question was substantially related to the functions and duties of automobile salespersons. For example, one court decision held that there was no evidence of any connection between the business of selling cars and the salesperson’s conviction for child molestation and therefore the salesperson’s license was improperly revoked.  However, another court subsequently held that an applicant’s conviction, less than one year earlier, for possession of cocaine with intent to sell, was a crime of moral turpitude substantially related to his performance and duties as a vehicle salesperson, and provided sufficient grounds for denial of his application.

The DMV’s “Occupational Licensing and Disciplinary Guidelines” are intended to provide the DMV with a detailed framework within which to decide whether a dealer’s or salesperson’s crime, act, or conduct is of sufficient moral turpitude and is sufficiently related to the functions and duties of a dealer or salesperson to warrant suspending, revoking, or refusing to issue an occupational license. The guidelines contain a list of some common crimes which have been divided into three different classes (Type A, Type B and Type C) for the purpose of determining the severity of proposed disciplinary action. For example, according to the guidelines, a Type A offense, which is deemed the most serious, is considered to be a crime involving moral turpitude which has a substantial connection or relationship to the duties of an occupational licensee. Accordingly, the guidelines indicate that the commission of a Type A offense within the previous five years will almost always result in the outright denial of a license. Less serious crimes involving moral turpitude which have a substantial connection or relationship to the licensee’s duties will not automatically result in the denial of an occupational license. A Type C offense, deemed the least serious, is not considered to involve moral turpitude, and therefore requires close review of the underlying facts and circumstances leading up to the offense before a determination can be made.

The full text of these guidelines, together with the DMV’s list of Type A, Type B and Type C crimes is set out under the section Occupational Licensing and Disciplinary Guidelines later in this chapter. In any licensing situation, these guidelines should be reviewed carefully. Any questions regarding the application of these guidelines to a specific set of circumstances should be addressed to one’s legal counsel.

Unlawful Use of Salesperson’s License

It is unlawful under the Vehicle Code for any person:

  • To lend a salesperson’s license to any other person or knowingly permit its use by another.
  • To display or represent any salesperson’s license not issued to the person as being his or her license.
  • To fail or refuse to surrender to the DMV, upon its lawful demand, any salesperson’s license which has been suspended, revoked or cancelled.
  • To permit any unlawful use of a salesperson’s license issued to him or her.
  • To photograph, photostat, duplicate, or in any other way reproduce any salesperson’s license or facsimile thereof in such a manner that it could be mistaken for a valid license, or to display or have in possession any such photograph, photostat, duplicate, reproduction, or facsimile unless for display by a dealer, or as authorized by the Vehicle Code.

Salesperson’s Licensing Issues and Rules

Dealerships and salespersons should be aware of various licensing matters. Failure to comply with the rules can lead to serious DMV problems for dealerships and salespersons, including criminal misdemeanor charges and administrative action against a dealer’s and/or salesperson’s license. Some of the matters discussed below have recently been brought to CNCDA’s attention.

All of the Occupation Licensing forms described below are available by search on the Forms section of the DMV’s website at https://www.dmv.ca.gov/portal/forms/. They can be completed online and printed out. In submitting documents to the DMV, it is suggested that you enclose an extra completed copies and ask the DMV to  date-stamp the copies to return to you along with confirmation of the filing.

Salesperson Employment Commencement and Termination

Various salesperson licensing issues previously brought to the attention of some dealers in Southern California are discussed below. It was determined by the DMV that certain personnel working in dealerships were required to be licensed as salespersons, but did not have salesperson licenses. The Vehicle Code provides that no dealer shall: Employ any person as a salesperson who has not been licensed pursuant to Article II (commencing with Section 11800), and whose license is not displayed on the premises of the dealer as required by section 11812, or willfully fails to notify the department by mail within 10 days of the employment or termination of employment of a salesperson.

It is important to note that it is the dealer’s duty to display the salesperson license and to notify the DMV by mail within 10 days of the employment or termination of employment of a salesperson.

The termination of employment must be reported to the DMV on DMV Form OL 16A, Salesperson Change of Employment. This form can be obtained from the DMV or online at:

https://www.dmv.ca.gov/portal/uploads/2020/05/ol16a.pdf.

After a routine inspection conducted in Southern California, the DMV determined that a General Manager of a dealership corporation did not both own stock and have a director position in the corporation, and was thus required to have a salesperson license. Failure to have such a license resulted in an arrest and charging of the General Manager with a criminal misdemeanor. This example makes it clear that the exemption provisions of the salesperson licensing laws must be carefully reviewed by dealers in order to determine whether a salesperson license is required in particular instances.

Salesperson Change of Address and Responsibilities

The Vehicle Code provides: It shall be unlawful for any person to act as a vehicle salesperson without having first procured a license or temporary permit issued by the department or when that license or temporary permit issued by the department has been cancelled, suspended, revoked, or invalidated or has expired.  

The Vehicle Code further provides in part as follows:

  1. Every vehicle salesperson licensed under this Article shall, at the time of employment, deliver to his or her employing dealer his or her salesperson’s license to be posted in a place conspicuous to the public on the premises where he or she is actually engaged in the selling of vehicles for the employing dealer.
  2. The license shall be displayed continuously during the employment. If a vehicle salesperson’s employment is terminated, the license shall be returned to the salesperson.
  3. Every vehicle salesperson licensed pursuant to this Article shall report in writing to the department every change of residence address within 5 days of the change.

The form for a salesperson to report an address change is DMV Form OL 18. A salesperson should use page 2 of this form which is titled “Report of Change of Address of a Vehicle Salesperson.” According to the DMV’s website there is a $15 fee for a salesperson to file the change of address form. It is the salesperson’s duty to report the change; this is not the dealer’s responsibility. The form gives the following as the address to use for a salesperson to report the change:

Department of Motor Vehicles
Licensing Operations Division
P.O. Box 932342
Mail Station L224
Sacramento, California 94232-3420

Misdemeanor and Licensing Actions

It is important to note that a violation of any of the statutes described above are classified as a criminal misdemeanor, and not an infraction. This applies to the statutes regulating both dealers and salespersons. Additionally, the dealer’s or salesperson’s license is subject to an administrative accusation to revoke or suspend the particular license for violating any of the above rules.

Audit and Processes Recommended

It would be prudent and beneficial for dealerships to conduct an audit to see if they are following the rules stated above. It is easy to overlook rules in these areas, and dealerships should have processes in place to ensure that they remain in compliance. It also is a good idea to remind salespersons of their obligation to notify the DMV of address changes by including this requirement in the dealership’s employee handbook. Another helpful tip suggested by a DMV inspector is to place all of the salespersons’ licenses in the display case in order of their expiration date so that a dealership employee can quickly and easily determine the next salesperson’s license that needs to be renewed.

Deadbeat Parent Laws

Vehicle salespersons are among those affected by two important laws aimed at the state’s general policy to clamp down on individuals who are delinquent in their obligations to make child or family support payments.

Under the first law, if an individual fails to make child support payments, a district attorney will notify the Department of Social Services. That department then compiles a list of those individuals, and provides the list to a number of different agencies which regulate or license persons engaged in various businesses or professions, including  the DMV. Prior to issuing or renewing a vehicle salesperson’s license, the DMV is required to review the list and if the applicant or licensee is shown on the list, the DMV will not be able to issue or renew the applicant’s license until a release order has been provided by the Department of Social Services.

The second law requires dealers, among other specified employers, to report new hires or rehires to the California Employment Development Department (“EDD”) within 20 days of their hire or rehire. If the dealer files such reports electronically, then the reports must be submitted by two monthly transmissions not less than 12 days nor more than 16 days apart. The reporting requirement extends to all employees of the dealership, including salespersons, and is designed to help locate parents who have failed to meet their child support obligations, and after January 1, 2019, for several other purposes, including but not limited to enforcement of taxes, locating people to establish paternity, and administration of workers compensation programs. The information received by the EDD will then be provided to county district attorneys who are then able to locate the individual’s employer and garnish the wages of the delinquent employee. Failure to submit this information, absent good cause, may subject a dealer to a penalty of $24, or $490 if the failure is the result of conspiracy between the dealer and the employee.

Occupational Licensing and Disciplinary Guidelines

The DMV publishes its Occupational and Disciplinary Guidelines on its website at: https://www.dmv.ca.gov/portal/uploads/2020/04/disc_guide.pdf.  

The Guidelines provide the following in considering whether certain acts and crimes are substantially related to the licensed activity:

  1. When considering whether a license should be issued with a warning letter, on a restricted (probationary) basis, denied, suspended or revoked, on the basis of a criminal conviction, or on the basis of commission of an act or engagement in any conduct involving moral turpitude, the crime, act or conduct shall be deemed to be substantially related to the qualifications, functions, or duties of the licensed activity if it involves:
    1. The fraudulent taking, obtaining, appropriating or retaining of funds, property, services or labor belonging to another person.
    2. Counterfeiting, forging or altering of money, any instrument, or any receipt, or the uttering of any materially false statement.
    3. Willfully attempting to derive a personal financial benefit through the nonpayment or underpayment of any fees, duties, taxes, assessments or levies duly imposed upon the licensee or applicant by federal, state or local government.
    4. The use of bribery, fraud, deceit, falsehood, extortion, or misrepresentation to achieve an end.
    5. Sexually related conduct causing physical harm or emotional distress to a person who is a witness or nonconsenting participant in the conduct or convictions which require registration pursuant to the provisions of Section 290 of the Penal Code.
    6. Importation, transportation, or possession for sale or distribution of any controlled substances, illegal weapons, goods for which duties have not been paid, or other contraband in violation of any laws, rules or ordinances imposed upon the licensee or applicant by federal, state or local government.
    7. Willfully violating or failing to comply with any licensing, registration, tax, or regulatory provision of Divisions 3, 3.5, 3.6, 4, or 5 of the Vehicle Code, which has resulted in damage, loss, or harm to any individual, the public, or to the State of California.
    8. Willfully violating or failing to comply with a statutory requirement that a license, permit or other entitlement be obtained from a duly constituted public authority before engaging in a business or course of conduct.
    9. Doing of any unlawful act with the intent of conferring a financial or economic benefit upon the perpetrator or with the intent or threat of doing substantial injury to the person or property of another.
    10. Doing any unlawful act of physical harm or violence which resulted in substantial loss or injury to the person or property of another.
  2. The conviction of a crime, act or conduct constituting an attempt, solicitation or conspiracy to commit any of the above enumerated acts or omissions is also deemed to be substantially related to the qualifications, functions, or duties of a licensee of the department.
  3. If the crime, act or conduct is substantially related to the qualifications, functions, or duties of a licensee of the department, the context in which the crime, act or conduct were committed shall go only to the questions of the weight to be accorded to the crime, act or conduct, in considering the action to be taken with respect to the applicant or licensee.

The following are guidelines for rehabilitation, denial, suspension, revocation, reinstatement or reduction of penalty:

  1. When considering a license denial, suspension, revocation, reinstatement or reduction of penalty, the department will consider the following criteria:
    1. Nature and severity of the criminal conviction(s), act(s), or conduct.
    2. Any criminal record and evidence of any act(s) or conduct committed subsequent to the criminal conviction(s), act(s) or conduct under consideration which also could be considered as grounds for denial, suspension or revocation.
    3. The time that has elapsed since the criminal conviction(s), act(s) or conduct referred to in subdivision (1) or (2), excluding any time spent incarcerated on such conviction(s)
    4. The extent to which the applicant or licensee has complied with any terms of parole, probation, restitution or any other sanctions lawfully imposed against the applicant or licensee.
    5. If applicable, evidence of expungement proceedings pursuant to section 1203.4 of the Penal Code.
    6. Evidence, if any, of rehabilitation submitted by the applicant or licensee.

These occupational licensing guidelines are intended for use in determining whether to issue or refuse to issue an occupational license on the basis of criminal convictions and prior department actions. For purposes of analysis, criminal convictions are divided into three categories, which are identified as Class A crimes, Class B crimes and Class C crimes.

Attachment 1 of the Guidelines has a list of the more common Class A, B and C crimes. Based on the classifications, an unlisted crime will require analysis to determine if it fits a particular Class. Class A crimes are serious crimes involving moral turpitude which have a substantial connection or relationship to the duties of an occupational licensee. Instead of attempting a lay definition of the complex legal term “crime involving moral turpitude”, a list of such crimes which are serious and have a substantial connection or relationship to the duties of an occupational licensee are listed in Attachment 1 of the Guidelines as Class A Crimes. Less serious crimes involving moral turpitude which have a substantial connection or relationship are listed in Attachment 1 as Class B Crimes. Crimes which have a less substantial connection or relationship to the duties of the licensed activity, or which have a connection only if facts not part of the conviction can be independently proven are listed in Attachment 1 as Class C Crimes. The use of criminal convictions to deny an occupational license, whether Class A, Class B, or Class C, depends to a large degree on when the convictions occurred in relationship to the date of the license application.

Use of Dealer Special Plates

Requirements For Use of Dealer Plates under Special Plates Regulation

Dealers, manufacturers, remanufacturers and distributors may obtain special plates for display on vehicles used in their business.  However, the rules for the use of these special plates are general in nature and give little guidance on their permissible use in particular circumstances

In response to this problem, the Office of Administrative Law approved a “Special Plates” regulation promulgated by the Department of Motor Vehicles. This regulation governs the uses of special plates issued to automobile dealers, manufacturers, remanufacturers and distributors.

The regulation provides that special plates may only be used on vehicles that a dealer, manufacturer, remanufacturer or distributor owns or lawfully possesses.  Further, only the following individuals may operate a vehicle with special plates for any purpose: (1) an individual who is the sole owner, a general partner, a manager of a limited liability company, or a corporate officer or director of a dealer, manufacturer, remanufacturer, or distributor, provided the individual is actively engaged in the management and control of the business operations of the dealer, manufacturer, remanufacturer, or distributor; (2) a general manager, business manager or sales manager who is actively engaged in the management and control of the business operations of the dealer, manufacturer, remanufacturer, or distributor when no other individual meets the criteria in (1) above; or (3) an individual employed by a manufacturer or distributor and licensed as a representative.

Thus, in order to qualify for unlimited use of a special plate, the individual must meet the following two-prong test: (1) the individual must be a sole owner of a dealership that is a sole proprietorship, a general partner of a dealership that is a partnership, a manager of a dealership that is a limited liability company, or a corporate officer or director of a dealership that is a corporation; and (2) the individual must be actively engaged in the management and control of the business operations of the dealership. If no individual at a dealership qualifies under this test, a general manager, business manager or sales manager that is directly engaged in the management and control of the business operations of the dealership can qualify.

It is important for dealers to understand that under this law, a general manager, business manager or office manager that is not also a general partner, manager of a limited liability company or corporate officer or director of the dealership does not qualify for special plate use unless no one else at the dealership can qualify. The limited exception for the use by managerial employees of dealer plates described above was intended to accommodate publicly traded dealership groups that may not have an officer or director employed at the dealership. Similarly, a family member or other person that is an officer or director of the dealership, but who is not actively engaged in the management and control of the business operations of the dealership, also does not qualify for special plate use.

The following are some examples of the improper use of special plates:

  • The son of a dealer principal driving himself to and from high school.
  • The wife of a dealer principal making shopping trips unrelated to her husband’s use of the vehicle.
  • A dealership office manager, who is neither a licensed salesperson nor an officer or director of the corporation, is assigned a demonstrator vehicle for unlimited use.

Any licensed driver may operate a vehicle with special plates for any purpose if a qualified individual identified above is also in the vehicle. An unaccompanied licensed driver, who regularly resides in the immediate household of an individual identified above, may operate a vehicle with special plates solely to pick up or drop off that individual.

The following are some examples of proper uses under this subdivision:

  • The daughter of a dealer principal driving on a trip with her parents as long as the dealer principal is also in the vehicle.
  • A dealer principal’s wife, who is not employed at the dealership, picks up her husband at the airport.
  • A licensed driver who is an employee of a dealer, manufacturer, remanufacturer or distributor may drive a vehicle with special plates when that employee is acting within the course and scope of his or her employment.

The following are some examples of proper uses of dealer plates by employees of the dealership acting within the scope of his or her employment:

  • A secretary of the dealership driving to the bank to make a deposit for the dealership.
  • A salesperson or other employee driving a vehicle for demonstration or testing purposes.
  • An employee of the dealership transferring vehicles between dealership facilities, but not for non-employees of the dealership (such as an employee of a vendor or subcontractor).

Any licensed driver may operate a vehicle with dealer, manufacturer, remanufacturer, or distributor special plates for special event purposes if the operator carries a letter of authorization from the licensee identifying the vehicle, duration, and location of operation, and person(s) authorized to operate the vehicle.  This provision is not intended by the Department of Motor Vehicles to be as broadly interpreted as it may first appear. It is not within the discretion of a dealer to unilaterally designate a “special event” and issue a “special event letter” to a non-employee of the dealership. Special events must be approved by the Department of Motor Vehicles.

The following are some examples of proper uses of dealer plates for “special events”:

  • Department of Motor Vehicles issues a letter to Chrysler authorizing the use of 100 Chrysler minivans for the Rose Bowl Parade.
  • Department of Motor Vehicles issues a letter to a dealer approving the use of 10 Cadillacs at a PGA golf tournament.

Any licensed driver, who is a prospective buyer or lessee, may test drive a vehicle with special plates for up to seven (7) days.  A salesperson is not required to be present, but if a salesperson is not present, the operator must carry a letter of authorization from the licensee identifying the vehicle, duration, and person(s) authorized to operate the vehicle.  Notwithstanding the foregoing, be sure to keep in mind that, according to the DMV, a prospective purchaser becomes a purchaser after he or she has either paid the full purchase price or signed a purchase contract, after which time the purchased vehicle must be registered.

The following is an example of a proper use by a prospective purchaser of a vehicle with dealer plates:

  • A dealer permits a customer that has not signed a contract to purchase the vehicle to take a new vehicle home for the weekend for a test drive, as long as the customer has a letter from the licensee identifying the vehicle, duration and the person(s) authorized to operate the vehicle.

The following are examples of improper uses under the prospective purchaser subdivision:

  • A service customer borrowing an unregistered dealer vehicle while her vehicle is being repaired.
  • A customer driving a new car to Nevada to register it in that state after already paying the dealer the purchase price.

Employees of a commercial vehicle dealer, manufacturer, remanufacturer, or distributor who must operate a commercial vehicle in the course of their employment may take a commercial drive test in a commercial vehicle displaying dealer, manufacturer, remanufacturer, or distributor special plates.  A trailer, displaying special plates, may be towed by a vehicle with Vehicle Code authority to operate on the highways.

The following is an example of an improper use under this subdivision:

  • A dealer principal driving a dealer plated vehicle that is towing a dealer plated boat trailer that is not part of the dealer’s inventory (the boat trailer cannot be operated on the special plate).

Any use of special plates issued to a dealer, manufacturer, remanufacturer, or distributor except as specified above (or otherwise authorized in the Vehicle Code; see discussion below on Vehicle Code provisions dealing with special plates) is prohibited.

Vehicle Code Provisions on the Use of Special Plates

Every owner, upon receipt of a registration card issued for special plates, shall maintain the same or a facsimile copy thereof in the vehicle bearing the special plates.  Special plates are valid for a period of one year from midnight of the last day of the month of issuance.  If application for renewal of the special plates is not made by midnight of the expiration date, application for renewal may be made within 30 days after expiration although a penalty will be assessed in addition to the regular fee.  In no event may special plates be renewed after expiration of the 30-day period.  Although not reflected in the new special plate regulation, there are also two Vehicle Code provisions that deal with the proper and improper use of dealer plates that dealers should be aware of and which are discussed below.

Salespersons

The Vehicle Code specifically authorizes special plates to be used on “vehicles rented or leased to vehicle salesmen in the course of their employment for purposes of display or demonstration.”  If a dealer has a demonstrator assigned full time to a particular salesperson, the dealer must make sure that the salesperson has a copy of the written rental or lease agreement with him or her in the vehicle at all times. The rental or lease agreement, should reflect that the salesperson is expected to display or demonstrate the vehicle at all times it is operated and that the vehicle is not to be used for personal, family, or household purposes. A demonstrator lease agreement also should provide, among other things, that the salesperson will:

  • Keep the vehicle in public view at all reasonable times and whenever reasonably feasible, offer the vehicle for test drives to potential buyers or lessees.
  • Keep the vehicle well maintained, washed, and polished.
  • Indemnify dealer from any and all claims arising out of salesperson’s use, operation or maintenance of the vehicle.

Work Vehicles

The Vehicle Code also specifically excludes “work or service vehicles” owned by a dealer from being operated with special plates. As such, the following types of vehicles are examples of some of those that cannot be operated on special plates: (i) parts delivery and pickup vehicles, (ii) tow vehicles, (iii) vehicles loaned to service customers, and (iv) vehicles rented or leased to any individual(s) other than a vehicle salesperson in the course of their employment for the purposes of display or demonstration.

Public Signs at Dealerships

Overview

California and federal statutes and regulations require the placing of various signs, cer­tificates, and licenses at the dealership premises.

An attempt has been made to exhaustively re­search state and federal law for sign requirements. However, because of the massive volume of state and federal statutes and regulations, it is possible that some requirements for a sign, certificate, or li­cense may not be included in this chapter. If you become aware of any re­quired sign, certificate or license not included here, please bring that to the attention of your Association representative so that it may be included in the next edition of this Management Guide.

Covered Elsewhere

Employment Notices

The chapter does not cover notices that must be posted for the benefit of employees. For discussion of employment issues, please see the CNCDA Employment Law Manual.

Ancillary Businesses

This discussion does not attempt to cover the vari­ous signs and postings required of activities not directly associated with new vehicle dealerships. Dealers who provide ancillary goods and services should therefore be sure to obtain sign and posting compliance information from all regulatory agencies having jurisdiction over such activities. Some ancillary businesses having posting requirements include car washes, recreational vehicle shows, locksmiths, auctioneers, motor fuel or liquefied petroleum retailers, repackagers of lubricating oil, impound lots, tire and used-oil collection or recycling centers, vending machine or public coin telephone owners, providers of food or beverages, vehicle registration services, launderers of wiping rags, li­censed lenders, check cashers, credit union related promotions, property brokers, pawn brokers, and retailers offering trading stamps. Also excluded are notices that must be posted when a dealer’s license is suspended or terminated by the DMV.

Hazard and Environmental Warnings

Signs and postings dealing with chemical and haz­ardous materials or hazardous activities at the deal­ership, and required business plans respecting emergency release, are excluded from discussion in this chapter since they depend upon the par­ticular substances, equipment, and proce­dures used at each dealership. Signs or labels required under these excluded topics can include warnings regarding materials and chemicals known or suspected to cause cancer and birth defects, warning signs to be placed during overhead window washing, in elevators and dumbwaiters, warnings related to unreinforced masonry buildings in earthquake zones, and environmental protection notices such as those imposed on temporary household hazardous waste collection facilities licensed, or deemed licensed, by the Department of Health Services.

Consistent with the above, signs and labels required by Proposition 65 dealing with hazardous and toxic materials are excluded from discussion in this chapter. A new Proposition 65 went into effect on August 30, 2018, and Dealers who have not already done so should contact the Association for information on resources available to assist dealers in implementing a comprehensive Proposition 65 compliance program, including the CNCDA Proposition 65 Handbook available upon login in the CNCDA Comply section of the Association’s website, www.cncda.org.

Posting of licenses and permits from local and state fire, health, and building and safety agencies are also excluded from discussion in this chapter.

Contact the applicable regulatory agencies and your environmental and safety consultants for assistance in this area. Your work­ers’ compensation carrier may be able to direct you to a consultant.

Local Ordinances and Regulations

Cities and other local governments generally require business licenses and related notices to be posted, and many maintain posting rules for hazardous substances. You should check with local government officials to see what may apply.

Web and Internet Sites

Notices that must be posted on Web sites are not included in this discussion, including, for example, the privacy notice required under Business and Professions Code section 22575 et seq.

Signs on Vehicles

Warnings, stickers, instructions, and other mate­rials required to be affixed or attached to any motor vehicle are not included; this topic is covered in the chapter entitled “Other Important Topics.”

California Consumer Privacy Act

Notices to be posted or provided pursuant to the California Consumer Privacy Act are not included in this discussion, including, for example, the notice required under 11 California Code of Regulations section 999.305. Additional information on this topic is contained in the CNCDA California Consumer Privacy Act of 2018 Compliance Handbook (Third Edition) accessible on CNCDA’s website (www.cncda.org) under the “CNCDA Comply” tab.

Table of Public Signs

Below is a table of required signs. References to B. & P. are to the California Business and Professions Code; references to CCR are to the California Code of Regulations; references to CFR are to the Code of Federal Regulations.

Name of Sign

Law Governing

Where to Post

1. General Repair Shop Sign

B & P Code 9884.17, 16 CCR 3351.3 and 3351.4

In a place conspicuous to all customers at the repair dealer’s location or at each location if multiple locations are used or given as a handout when conducting business at other locations.

2. B.A.R. Certificate of Registration

B & P Code 9884.6 and 16 CCR 3351.3(a)

In a place conspicuous to customers.

3. Sign Posting Hours Repair Shop is Open to Public

16 CCR 3340.15

In a place conspicuous to the public.

4. Posting of Labor Rates, Non-Smog (Not Required)

There is no law requir­ing the posting of non-smog labor rates and posting is not recommended.

If posted, in a place conspicuous to repair shop customers.

5. Display of Lamp and Brake Station Licenses

16 CCR 3307(a)

In the station.

6. Display of Adjusters’ Li­censes

16 CCR 3307(b)

Prominently displayed in the station.

7. Lamp and Brake Station Signs

16 CCR 3307(c); 16 CCR 3309

In a location clearly visible from outside the station.

8. Lamp and Brake Station Prices

16 CCR 3307(d)

In a conspicuous place.

9. Muffler Station Sign

13 CCR 604(b) and 606

In a location clearly visible from outside the station.

10. Display of Muffler Station Li­cense

13 CCR 602 and 604(a)

Prominently in cus­tomer area of station.

11. Posting of Muffler Station Prices

13 CCR 604(c)

Conspicuously in cus­tomer area.

12. Smog Check Station Sign

Health & Safety 44033(a), 16 CCR 3340.22

In a place conspicuous to the public.

13. Smog Check Station Failed Vehicle Repair Options

Health & Safety 44017.3 and 44017, 16 CCR 3340.22.2

Conspicuously in area frequented by custom­ers.

14. Display of Smog Check Sta­tion Licenses

16 CCR 3340.15(c)

Prominently in area frequented by custom­ers.

15. Smog Check Station Prices

16 CCR 3340.15(d)

Conspicuously in area frequented by custom­ers.

16. Smog Check Test Only Sign

16 CCR 3340.16(b)

Conspicuously in area frequented by custom­ers.

17. No Cooling Off Period Without Cancellation Option Sign

Vehicle Code section 11709.2

In all cubicles or offices where contracts nego­tiated or executed.

18. Right to Inspect Used Vehi­cles Sign

Vehicle Code section 11709.1

In place conspicuous to the public.

19. Spanish/Foreign Translation of Con­tract Sign

Civil Code section 1632

In a place conspicuous to buyer. (F & I office)

20. Presale Availability of Warranty

15 U.S.C. section 2302; 16 CFR 702.3

In the new and used sales, F&I, service write-up, and parts counter areas, conspicuous to vehicle, accessory, and parts pur­chasers.

21. Availability of Service Bulletins Sign

Civil Code section 1795.91

In the showroom or other area conspicuous to motor vehicle pur­chasers.

22. Sign Regarding Credit Card Request for Check Writing

Civil Code section 1725

If required, in con­spicuous location where check is written. (see discussion below)

23. Policy Concerning Refunds and Exchanges Sign

Civil Code section 1723(a) and (b)

Either at each cash register and sales counter, at each public entrance, on tags at­tached to the item, or on seller’s order forms, if any.

24. Cellular Telephone Activation Notice

B. & P. Code section 17026.1

Where cellular tele­phones are displayed and purchased.

25. Grey Market Goods Sign

Civil Code section 1797.8

Conspicuously at prod­uct’s point of display and affixed to the product.

26. Anti-Graffiti Warning Sign

Penal Code section 594.1

Conspicuous place where paint sold.

27. Child Passenger Restraint Sign

Vehicle Code section 27365

In a place conspicuous to the public.

28. Rental Company Damage Waiver Signs

Civil Code section 1939.09

At place where renter signs the contract.

29. Display of Sales Tax Permit

Revenue & Taxation Code section 6067

Conspicuously in business office.

30. Posting of Insurance Li­censes

Insurance Code section 1725

Prominently displayed in the holder’s office.

31. Posting of Dealer License

Vehicle Code section 11709(a)

In place conspicuous to the public.

32. Display of Salesperson Li­censes

Vehicle Code section 11812

In place conspicuous to the public where he or she sells.

33. Display of Business License

B & P 16111

In the business office.

34. Contract for Parking or Storage Sign

Civil Code section 1630

Conspicuous place at each entrance of park­ing lot.

35. Public Parking Prohibited Sign

Vehicle Code section 22658(a)

At all entrances to parking areas.

36. Storage Charges for Towed Vehicles Sign

Civil Code section 3070

If required, in plain view at all cashiers’ stations. (see discussion below)

37. Exit Signs

Labor Code section 142.3; Health & Safety Code section 18943(c); 8 CCR 3216

At every exit of inter­section of corridors, ex­its, stairways or ramps, etc.

38. Offsite Display

13 CCR section 270.08

In close proximity to or on vehicles when off site.

39. Lien Sale

Civil Code section 3072(f)

Conspicuous place on the premises of the business office.

40. No Smoking

Labor Code section 6404.5

At each entrance to the dealership.

41. Fuel Economy Guide Booklet

49 USC 32908

Prominently in showroom or sales area

42. Towing Fees and Access Notice

Vehicle Code section 22651.07

In the office area of the storage facility, in plain view of the public

43. Battery Fee and Refundable Deposit

Health and Safety Code 21215.2(c)

A clearly visible place in the public sales area of the establishment.

Language and Format of Signs

Sign #1. General Repair Shop Sign

In addition to being required to post this sign, when conducting business from other than the dealer’s principal business address, the dealer shall provide to every customer a copy of the automotive repair dealer’s sign, reduced to fit on 8½” x 11” white paper.

Dealers who, as of June 30, 2006, had the older version of the general repair shop sign may, in lieu of replacing the sign with the new version, post a supplemental sign in proximity to the main sign. The supplemental sign appears as follows:

Figure 1-2

Sign #2. B.A.R. Certificate

Sign 2 refers to the Certificate of Registration or “license” issued by the Bureau of Automotive Repair to the dealer.

Sign #3. Hours Open to Public

THIS SHOP IS OPEN FROM _____ A.M. TO _____ P.M.

Sign #4. Posting of Labor Rates

Neither California or Federal law ­requires the posting of labor rates in repair shops. It is not rec­ommended that labor rates be posted or be set forth on your repair orders. Various sections of Titles 13 and 16 of the California Code of Regulations as footnoted below, do provide for the posting of prices for lamp, brake, smog inspection and muffler stations.

Sign #5. Lamp, Brake, and Smog Check Station Licenses

The display of these licenses are to be under glass or other transparent cover and prominently displayed in the station.

Sign #6. Adjustors’ Licenses

Licenses of Adjustors employed at a licensed sta­tion are to be mounted under glass or other transparent cover and prominently displayed in the station.

Sign #7. Lamp and Brake Station Official Signs

Figures 7-2 shows these signs. The exact dimensions are available from the Bureau of Auto­motive Repair.  

Figure 7-1
Figure 7-2

Sign #8. Lamp, Brake, and Smog Check Station Prices

A dealer must post conspicuously a list of price ranges for the specific activities for which it is li­censed. Prices may be stated either as a fixed fee or an hourly rate on a time‑and‑material basis.  (See discussion of Sign #15 below on Dealers Smog Check Station Prices)

Sign #9. Muffler Station Official Sign

Figures 9-1 shows the layout and dimensions of this sign.

Figure 9-1

Sign #10. Muffler Station License

The license of a muffler certification station shall be prominently displayed under glazing material in the customer area of the station.

Sign #11. Muffler Station Prices

Each muffler certification station must post con­spicuously in the customer area the prices for issuing exhaust certifications and for clearing enforcement documents.

Sign #12. Smog Check Station Offi­cial Sign

Service signs required to be 24 inches wide and 30 inches high, made of 0.040 alu­minum or steel. Camera-ready design and content of required signs are available from the Bureau of Automotive Repair.

Sign #13. Smog Check Station Failed Vehicle Repair Options

Smog Stations must also conspicuously post a sign issued by the Department of Consumer Affairs explaining potential vehicle repair assistance and vehicle retirement options for consumers whose vehicles fail smog check. The dimensions of this sign are set forth in the Discussion of Applicable Statutes and Regulations section of this chapter.

Sign #14. Smog Check Station Li­censes and Certificates

The station license, inspector license, and/or repair technician license shall be posted prominently under glass or other transparent material in an area frequented by customers.

Sign #15. Dealer’s Smog Check Sta­tion Prices

The station is to post conspicuously in an area frequented by customers, a list of price ranges for the specific activities for which it is licensed. The posted prices are to include the price charged by the station for inspections, and, if a separate price is charged for reinspections, such reinspection price. The price of issuance of a certificate of compliance or noncompliance charged by the Bureau of Auto­motive Repair is to be posted separately from the price of the inspection and of the rein­spection, if any.

Sign #16. Smog Check Test Only Sign

THIS SMOG CHECK TEST ONLY STATION IS LICENSED TO TEST VEHICLES ONLY, AND CANNOT MAKE ANY REQUIRED DIAGNOSIS OR REPAIRS TO A VEHICLE WHICH HAS FAILED A SMOG CHECK TEST.

Sign #17. No Cooling Off Period Without Cancellation Option Sign

A notice not less than eight inches high and 10 inches wide, in each sales office and sales cubicle of the dealership where written terms of specific sale or lease transactions are discussed with prospective purchasers or lessees, and in each room of a dealer’s established place of business where sale and lease contracts are regularly executed, which states the following:

THERE IS NO COOLING-OFF PERIOD UNLESS YOU OBTAIN A CONTRACT CANCELLATION OPTION
California law does not provide for a “cooling-off” or other cancellation period for vehicle lease or purchase contracts. Therefore, you cannot later cancel such a contract simply because you change your mind, decide the vehicle costs too much, or wish you had acquired a different vehicle. After you sign a motor vehicle purchase or lease contract, it may only be canceled with the agreement of the seller or lessor or for legal cause, such as fraud. However, California law does require a seller to offer a 2-day contract cancellation option on used vehicles with a purchase price of less than $40,000, subject to certain statutory conditions. This contract cancellation option requirement does not apply to the sale of a recreational vehicle, a motorcycle, or an off-highway motor vehicle subject to identification under California law. See the vehicle contract cancellation option agreement for details.

Sign #18. Right to Inspect Used Ve­hicle Sign

This sign must be not less than 8 inches high and 10 inches wide and posted in a place conspicuous to the public.

THE PROSPECTIVE PURCHASER OF A VE­HICLE MAY, AT HIS OR HER OWN EXPENSE AND WITH THE APPROVAL OF THE DEALER, HAVE THE VEHICLE INSPECTED BY ANY INDEPENDENT THIRD PARTY EITHER ON OR OFF THESE PREMISES.

Sign #19. Spanish/Foreign Language Translation Sign

There should be posted in conspicuous locations visible before contracts negotiated in the foreign language are signed (such as in F & I offices) a sign that states, IN THE FOREIGN LANGUAGE, substantially the following:

WE ARE REQUIRED TO PROVIDE A [Language] LANGUAGE CONTRACT OR AGREEMENT IF WE NEGOTIATE (ORALLY OR IN WRITING) A SALE OR LEASE PRIMARILY IN THE [Language] LANGUAGE”

(In the above, [Language] is replaced, in turn by Spanish, Chinese, Tagalog, Vietnamese, or Korean)

Sign #20. Presale Availability of Warranty Sign

A dealer’s duty to make warranty terms and conditions available to customers for inspection before sale can be satisfied by posting a signs reasonably calculated to elicit the prospective buyer’s attention in prominent locations in the dealership advising prospective buyers of the availability of warranties upon request.  The following is an example of such a sign:  

WARRANTY TERMS AND CONDITIONS ARE AVAILABLE FOR YOUR REVIEW UPON REQUEST

Sign #21. Availability of Service Bulletins Sign

A dealer’s duty to notify prospective purchasers and lessees of manufacturer service bulletin avail­ability is satisfied if a sign is posted in the showroom or other area conspicuous to motor vehicle purchasers and written in the following form:  

FEDERAL LAW REQUIRES MANUFACTURERS TO FUR­NISH THE NATIONAL HIGHWAY TRAFFIC SAFETY ADMINISTRATION (N.H.T.S.A.) WITH BULLETINS DESCRIBING ANY DEFECTS IN THEIR VEHICLES. THESE BULLETINS ARE NOT RECALLS.

YOU MAY OBTAIN COPIES OF THESE TECHNICAL SERVICE BULLETINS FROM  NHTSA,

THE MANUFACTURER (ASK YOUR DEALER FOR THE TOLL-FREE NUMBER), OR

CERTAIN CONSUMER PUBLICATIONS, WHICH PUBLISH THESE BULLETINS. SOME COMPANIES WILL SEND THEM TO YOU, FOR A FEE

Sign #22. Credit Card Request for Check Writing Notice

In connection with check writing, if a request for a credit card, is, or might ever be made, you must either train your employees requesting the credit card to inform all check writing customers that they are not required to display a credit card to write a check; or post the following notice in a conspicuous loca­tion in the unobstructed view of the public within the premises where the check is being written, clearly and legibly.

CHECK WRITING I.D.: CREDIT CARD MAY BE REQUESTED BUT NOT REQUIRED FOR PURCHASES.

Sign #23. Refunds and Exchanges Policy

Unless otherwise agreed in writing, all sales are final; no refunds or exchanges.

Unless you allow full cash refunds during the first seven days after purchase, your actual refund policy must be conspicuously displayed either on signs posted at each cash register and sales counter, at each public entrance, on tags attached to each item sold under that policy, or on your order forms, if any. The display must state your policy, including, but not limited to, whether cash refund, store credit, or exchanges will be given for the full amount of the purchase price; the applicable time period; the types of merchandise which are governed by the policy; and any other conditions which govern the refund, credit, or exchange of merchandise. No dimensions are given for the sign, but it should be easily read by the public if you choose to use such a sign, rather than putting your policy on your order form.

Sign #24. Cellular Telephone Acti­vation Notice.

Anyone retailing cellular telephones is required by California law to post a large conspicuous sign, in lettering no smaller than 36-point type.  The sign shall be prominently displayed and visible to consumers and located in that area in each retail location where cellular tele­phones are displayed and purchased:

Activation of any cellular telephone is not re­quired and the advertised price of any cellular telephone is not contingent upon activation, ac­ceptance, or denial of cellular service by any cellular provider.

Sign #25. Grey Market Goods Sign

Retail sellers of “grey market goods” (see defini­tion below) must, under California law, post a conspicuous sign at the point of display of such goods and affix to the product or the package a conspicuous ticket, label, or tag disclosing:

As to each item checked below, this product:

is not covered by a manufacturer’s express written warranty valid in the United States (however, any implied warranty pro­vided by law still exists).

is not compatible with United States electrical currents.

is not compatible with United States broadcast frequencies.

has no replacement parts available through the manufacturer’s United States distributors.

has no compatible accessories available through the manufac­turer’s United States distributors.

is not accompanied by instructions in English.

is not eligible for a manufacturer’s rebate.

has other items of incompatibility or nonconformity with relevant domestic standards listed on the tag on the product.

Sign #26. Anti-Graffiti Warning Sign

Any dealer who sells aerosol containers of paint (which could include touch up paint) must post a sign in a conspicuous place in letters at least three-eighths of an inch-high stating:

Any person who maliciously defaces real or per­sonal property with paint is guilty of vandalism which is punishable by a fine, imprisonment, or both.

Sign #27. Child Passenger Restraint Sign

If you lease or rent vehicles to your customers for a period not exceeding four months, then the follow­ing sign must be posted in a place conspicuous to the public not smaller than 15 inches by 20 inches. It is uncertain whether a dealer who loans a “courtesy car” to a service customer without charge is required to comply with the signage and availability require­ments, but conservative dealers may wish to comply with the requirements in all circumstances.

CALIFORNIA LAW REQUIRES ALL CHILDREN WHO ARE 8 YEARS OF AGE TO BE TRANSPORTED IN A CHILD RESTRAINT SYSTEM. THIS AGENCY IS REQUIRED TO PROVIDE FOR RENTAL OF A CHILD RESTRAINT SYSTEM IF YOU DO NOT HAVE A CHILD RESTRAINT SYSTEM YOURSELF.

Sign #28. Rental Company Damage Waiver

NOTICE ABOUT YOUR FINANCIAL RESPONSIBILITY AND OPTIONAL DAMAGE WAIVER

You are responsible for all collision damage to the rented vehicle even if someone else caused it or the cause is unknown. You are responsible for the cost of repair up to the value of the vehicle, and towing, storage, and impound fees.

Your own insurance, or the issuer of the credit card you use to pay for the vehicle rental transaction, may cover all or part of your financial responsibility for the rented vehicle. You should check with your insurance company, or credit card issuer, to find out about your coverage and the amount of the deductible, if any, for which you may be liable.

Further, if you use a credit card that provides coverage for your potential liability, you should check with the issuer to determine if you must first exhaust the coverage limits of your own insurance before the credit card coverage applies.

The rental company will not hold you responsible if you buy a damage waiver. But a damage waiver will not protect you if (list exceptions).

“The cost of an optional damage waiver is $___ to $___ for every (day or week), depending upon the vehicle rented.

See the discussion of Sign #28 under the “Discussion of Applicable Statutes and Regulations” heading later in this chapter for alternative types of signs.

Sign #29. Sales Tax Permit

Each sales tax permit issued for each place of business within the state shall at all times be con­spicuously displayed at the place for which issued.

Sign #30. Insurance Licenses

Every license to act as a fire and casualty bro­ker‑agent shall be prominently displayed by the holder in his or her office.

Sign #31. Dealer DMV License

The Dealer license must be posted in a place con­spicuous to the public. Dealers must also have erected or posted on the premises signs or devices providing information in relation to the dealer’s name and the location and address of the dealer’s es­tab­lis­hed place of business to en­able every person doing business with the dealer to identify him or her prop­erly. Every such sign erected or posted on an estab­lished place of business, shall have an area of not less than 2 square feet per side displayed and shall contain lettering of sufficient size to enable the sign to be read from a distance of least 50 feet.

Sign #32. Salesperson DMV Li­censes

Every salesperson’s license, or a true and exact copy of the license, is to be posted in a place conspicuous to the public at each location where he or she is actually engaged in the selling of vehicles for the employing dealer. The license must be displayed continuously during employment.

Sign #33. Business License

You must post or display the receipt or certificate showing evidence of a business’ payment of the Business License Tax Receipt.

Sign #34. Contract for Parking or Storage Sign

If you have a contract for parking and storage of vehicles, then see the discussion of Sign #34 under the “Discussion of Applicable Statutes and Regulations” heading later in this chapter.

Sign #35. Public Parking Prohibited Sign

A sign not less than 17 by 22 inches in size, with lettering not less than one inch in height, displayed in plain view at all entrances to the property stating that public parking is prohibited, that vehicles will be removed at the owner’s expense, and, optionally, that a citation may be issued. The sign must also contain the telephone number of the local traffic law enforce­ment agency.

Sign #36. Storage for Towed Vehi­cles Sign

If a dealership causes a vehicle to be towed or re­moved in order to create or acquire a lienhold inter­est in the vehicle, then see the discussion of Sign #36 under the “Discussion of Applicable Statutes and Regulations” heading later in this chapter.

Sign #37. Exit Signs

Signs marking exits and giving directions to exits as required under certain California law is further discussed in Sign #37 under the “Discussion of Applicable Statutes and Regulations” heading later in this chapter.  

Sign #38. Off Site Vehicle Display

If a dealer engages in off premises display of ve­hicles at shopping centers, fairs, and the like, California law requires the posting of a sign on the vehicle or vehicles or in close proximity thereto, printed in letters of not less than three inches in height, with the name, location and address of the dealer’s established place of business and the follow­ing statement:

No sales permitted, or deposits accepted at this location.

Sign #39. Notice of Lien Sale

If a dealer conducts a lien sale of a vehicle worth less than $2,500, California law requires that for a period of at least ten days before the sale, a sign be posted in the business office or at such other site where the lien sale is to take place.  The sign is to provide as follows:

Notice of Vehicle Lien Sale
On ________, 20___, at exactly __:__
the vehicle with the following year, make, model, VIN, and California license number will be sold:

Sign #40. No Smoking

California law completely bans all smoking in the workplace.  Employers will not be guilty of knowingly permitting smoking by non-employees if there are posted at all entrances to the facility one of the following signs, as applicable to the dealership involved:

NO SMOKING

OR

SMOKING IS PROHIBITED EXCEPT IN DESIGNATED AREAS

Sign #41. Fuel Economy Guide Booklet

Federal law requires dealers to display the EPA’s Fuel Economy Guide booklet in the same manner it displays vehicle brochures.

Sign #42. Towing Fees and Access Notice

California law requires posting a “Towing Fees and Access Notice” sign whenever the dealer is charging for towing.  The sign text is contained in Vehicle Code section 22651.07.

Sign #43. Battery Fee and Refundable Deposit

California law provides that dealers shall post a written notice that is clearly visible in the public sales area of the establishment, or include on the purchaser’s receipt, the following language:

This dealer is required by law to charge a nonrefundable $1 California battery fee and a refundable deposit for each lead-acid battery purchased.

A credit of the same amount as the refundable deposit will be issued if a used lead-acid battery is returned at the time of purchase or up to 45 days later along with this dealer’s receipt.

Discussion of Applicable Statutes and Regulations

The following sets forth in greater detail the stat­utes and regulations applicable to the signs discussed above. In most situations the exact language of the particular statute or regulation is quoted. The sign numbers below refer to the signs identified both in the chart and the discussion above.

California Requirements

General Repair Shop Signs

General Repair Shop. Sign #1

California Business and Professions Code section 9884.17 states:

The Bureau shall design and approve of a sign which shall be placed in all automobile repair dealer locations in a place and manner con­spicuous to the public. Such sign shall give no­tice that inquiries concerning service may be made to the Bureau and shall contain the tele­phone number and Internet website address of the Bureau. Such sign shall also give notice that the customer is entitled to a return of replaced parts upon his request therefore at the time the work order is taken.

Title 16 of the California Code of Regulations, section 3351.3, provides as follows:

  1. Except as provided in subsection (b), all automotive repair dealers shall display the following in a place and manner conspicuous to their customers:

    (1) A current and valid certificate of registration as an automotive repair dealer issued by the bureau; and
    (2) An official automotive repair dealer’s sign, which meets the specifications of the Automotive Repair Act and Section 3351.4 of this article. In the event there are multiple facilities, an official automotive repair dealer’s sign shall be displayed in a place and in a manner conspicuous to all customers at each location.

  2. When conducting business from other than the principal business address shown in an automotive repair dealer’s registration, the dealer shall provide to every customer, with the customer’s copy of the work order as provided in paragraph (3) of subdivision (a) of Section 9884.7 of the Business and Professions Code, a copy of an official automotive repair dealer’s sign that meets the following specifications:

    (1) A copy of the sign shall be reproduced on a white sheet of paper, or similar material, no less than eight- and one-half inches by eleven inches (8½” x 11”) in size.
    (2) The sign shall be proportionately reduced in size to fill the page in portrait format with no more than one-inch (1”) margins outside the right, left and bottom inset border lines.
    (3) The current business name, address of record, business telephone number and registration number of the automotive repair dealer, as shown by the bureau’s records, shall be printed above the top inset border line of the sign in print no smaller than the smallest print of the reduced sign.
    (4) No other information, printing, decoration, border or design shall be placed on the page.

  3. For the purpose of subsection (b), the term “provide” shall mean to give for retention.

Title 16 of the California Code of Regulations, section 3351.4, provides as follows:

  1. Official automotive repair dealer signs shall meet the following specifications:
    (1) Content. Until June 30, 2006, signs shall be worded exactly as shown in either Figure 1 or Figure 3. On and after June 30, 2006, signs shall be worded exactly as shown in Figure 3, except that an automotive repair dealer possessing a valid registration on June 30, 2006, may comply with Section 3351.3 and this section by displaying a supplementary sign, containing the bureau’s Web site address. The supplementary sign shall be worded exactly as shown in Figure 5, and shall be displayed immediately below any sign that was displayed by the automotive repair dealer in compliance with Section 3351.3 and this section on and before June 30, 2006.

    (2) Dimensions. Signs as shown in Figure 1 shall have the dimensions shown in Figure 2, signs as shown in Figure 3 shall have the dimensions shown in Figure 4, and signs as shown in Figure 5 shall have the dimensions shown in that figure.

    (3) Sign Material. 24-gauge steel or aluminum or synthetic material of equivalent rigidity may be used. Synthetic material may be acceptable provided it meets all of the requirements herein, including durability.
    (4) Color. The background shall be semi-gloss white. All print, border stripe and divider stripes, including the State Seal shall be gloss black in color.
    (5) Paint. Paint shall be a premium grade exterior acrylic enamel or equivalent. The silk screen/bake-on process or an acceptable equivalent may be used.
    (6) Surface Preparation. All bare metal shall be etched and coated with white primer or equivalent to insure proper paint adhesion and corrosion protection.
    (7) Print. Largest lettering shall be 72 pt. Futura Demi “condensed;” medium lettering shall be 48 pt. Futura Bold; and smallest lettering shall be 36 pt. Futura Bold for the signs shown in Figures 1 and 3. The lettering of the supplementary sign shown in Figure 5 shall be 48 pt. Futura Bold for the message and 72 pt. Futura Demi “condensed” for the Web site address.
    (8) General. A three- and one-half inch diameter State Seal is required for the signs shown in Figures 1 and 3.
    (9) The use of embossed letters or a clear protective finish coat is permitted, but not required; and
    (10) There shall be a one-quarter inch mounting hole in each corner.
  2. Replacement. The bureau may require replacement of any sign which that fails to meet the outlined specifications or which that is no longer readily legible.
B.A.R. Certificate. Sign #2

Title 16 California Code of Regulations section 3351.3, provides in part as follows:

  1. Except as provided in subsection (b) [relating to requirements when conducting business from other than the principal business address shown in an automotive repair dealer’s registration], all automotive repair dealers shall display the following in a place and manner conspicuous to their customers:

    (1) A current and valid certificate of registration as an automobile repair dealer issued by the bureau; and
    (2) An official automotive repair dealer’s sign, which meets the specifications of the Act and Section 3351.4 of this article. In the event there are multiple facili­ties, an official automotive repair dealer’s sign shall be displayed in a place and manner conspicu­ous to all customers at each location.

Posting of Repair Hours Open To The Public. Sign #3

Title 16 California Code of Regulations section 3340.15 provides that a dealer whose facility has been granted smog check program certification shall remain open during business hours and have certified smog check personnel during those times. Therefore, it is recommended that the hours during which the facility is open to the public should be posted.

Posting of Labor Rates. Sign #4

Neither California nor Federal law requires the posting of non-smog labor rates in repair shops. The discussion there is very important to avoid claims of deception when flat rate hours or some similar system is used. Various sections of Title 16 of the California Code of Regulations quoted below provide for the posting of prices for lamp, brake, and smog inspection stations. Muffler station prices must also be posted as discussed below.

Lamp, Brake, and Muffler Stations

Title 16 of the California Code of Regulations, section 3307 provides that Official lamp and brake stations shall comply with the following provisions governing display of documents, maintenance of equipment, and record keeping.

Display of Station License. Sign #5

Display of Station License. An official station li­cense shall be placed under glass or other transpar­ent cover and prominently displayed in the station.

Display of Adjusters’ Licenses. Sign #6

Display of Adjusters’ Licenses. Licenses of all of­ficial adjusters employed at a licensed station shall be mounted under glass or other transparent cover and prominently displayed in the station.

Display of Station Sign. Sign #7

Display of Station Sign. Each official station ex­cept a fleet owner station shall display an official station sign which meets specifications in section 16 CCR 3309, and the sign shall be displayed in location where it is clearly visible from outside the station.

Title 16 of the California Code of Regulations, section 3309, provides as follows:

Official station signs shall meet the specifications illustrated in this section and shall be displayed in accordance with section 3307(c) of this article. A station which performs more than one official function may display a separate sign to designate each function or it may display one multipurpose sign appropriate to the official functions for which the station is licensed.

  1. Single Function Signs. Official station signs displayed separately to designate each function for which the station is licensed shall meet the follow­ing specifications:

    (1) Dimensions. Single function signs shall have the dimensions shown in Figure 7-1.
    (2) Color. Single function signs shall be bor­dered and lettered in light chrome yellow; and the background shall be royal blue.
    (3) Lettering. Single function signs shall have lettering in accordance with Figure 7-1, the exact dimensions of which are available from the Bureau of Automotive Repair.

  2. Multipurpose Signs. Multipurpose station signs displayed to designate the functions for which the station is licensed shall meet the following specifications:

    (1) Dimensions. Multipurpose signs shall have the overall dimensions, shield size, placement, and lettering size shown in Figures 7-2.
    (2) Color. Multipurpose signs shall have letter­ing, shield border and station designation(s) in light chrome yellow; and the background shall be royal blue.
    (3) Station Type Designation. The space to the right of the official station shield in a multipurpose sign shall be used to designate the official functions of the station, and such designation shall meet the requirements of section 3309(b)(1) of this article.

Posting Of Prices. Sign #8

Title 16 of the California Code of Regulations section 3307(d) provides:

Posting of Prices. Each official station except a fleet owner station may make a reasonable charge for the work performed and shall post conspicuously a list of price ranges for the specific activities for which it is licensed. Prices may be stated either as a fixed fee or an hourly rate on a time‑and‑material basis. No added charge shall be imposed for the is­suance of official lamp adjustment or official brake adjustment certificates, or certifications on enforce­ment documents or the correction of lamp or brake violations. No charge relating to repair, replacement of parts, or adjustment of lamps or brakes shall be imposed in addition to the posted price for such ad­justment or inspection unless such additional work and added charges are authorized in advance by the vehicle owner or operator.

Muffler Station Sign. Sign #9

Title 13 of the California Code of Regulations, section 604 (b) requires that each muffler certifica­tion station, except a fleet owner station that certifies only its own vehicles, shall display a muffler station sign meeting the specifications in section 606 of this title. The sign shall be displayed where it is clearly visible from outside the station.

Section 606 provides: “Signs for muffler certifi­cation stations must meet the following specifica­tions:

  1. Signs shall have the dimensions shown in Fig­ure 9-1. (Reproduced above.)
  2. The color of the signs shall be bordered and lettered in light chrome yellow. The background shall be royal blue.
  3. Lettering on the sign shall have the dimensions shown in Figure 9-2.” (Reproduced above.)
Display of Muffler Station License. Sign #10

Title 13 of the California Code of Regulations, section 601 provides that a “licensed muffler certifi­cation station” is an automotive repair facility that meets all requirements of this article of the Califor­nia Code of Regulations and is licensed and equipped to inspect, repair, replace, and certify ve­hicular exhaust systems. An “exhaust system” con­sists of all pipes, converters, and chambers through which the exhaust gas flows from the engine exhaust port to the end of the tailpipe.

Title 13 of the California Code of Regulations, section 604(a) requires that the license of a muffler certification station shall be prominently displayed under glazing material in the customer area of the station.

Posting Of Muffler Station Prices. Sign #11

Title 13 of the California Code of Regulations, section 604(c) requires that each muffler certifica­tion station, except a fleet owner station that certifies only its own vehicles, shall post conspicuously in the customer area the prices for issuing exhaust certifi­cations and for clearing enforcement documents.

Smog Check Stations

Smog Check Station Sign. Sign #12

Health & Safety Code section 44033(a) provides that smog check stations meeting the requirements established by the department may be licensed as a smog check station. A licensed smog check station shall display Sign #12 in a manner conspicuous to the public.

Title 16 of the California Code of Regulations, section 3340.22, provides for the following:

Each smog check station shall display an identi­fying sign that meets the following specifications:

  1. Dimensions. The sign shall be 24 inches wide and 30 inches high.
  2. Sign Material. The sign shall be made of 0.040 aluminum or steel.
  3. Content. Camera-ready design and content of the sign shall be supplied by the bureau.

Title 16 of the California Code of Regulations, section 3340.22.1, provides as follows:

  1. Separate sign requirements shall apply to the following types of stations which provide smog check program services:

    (1) Smog check test only stations.
    (2) Smog check stations which only inspect and/or repair heavy-duty vehicle.
    (3) Smog check stations which do not inspect and/or repair heavy-duty vehicles.

  2. The service signs required by subdivi­sion (a) shall be made of 0.040 aluminum or steel stock and shall be 24 inches wide and 8 inches high. Camera-ready design and content of required signs are available from the Bureau upon request.
  3. Service signs shall be securely at­tached to the bottom of or immediately below the smog check station signs required by section 3340.22 of this article. Attachment shall be by ring, hook, bracket, or similar device.
Required Smog Repair Limits Sign. Sign #13

Health & Safety Code section 44017.3 provides as follows:

  1. The department shall provide a licensed smog check station with a sign informing customers about options when their vehicle fails a biennial smog check inspection, including, but not limited to, the option for qualified consumers to retire vehicles, receive repair assistance, or obtain repair cost waivers. The sign shall include the department’s means of contact, including, but not limited to, its telephone number and Internet Web site. This sign shall be posted conspicuously in an area frequented by customers. The sign shall be required in all licensed smog check stations.
  2.  In stations where licensed smog check technician repairs are not performed, the station shall have posted conspicuously in an area frequented by customers a statement that repair technicians are not available and repairs are not performed.

Title 16 of the California Code of Regulations, section 3340.22.2 reads as follows:

Smog Check Station Repair Cost Limits Sign

  1. The sign required by section 44107.3 of the Health and Safety Code shall be provided by the bureau and shall have the following dimensions and specifications.

    (1) Sign shall be 22 inches wide and 16 inches high.
    (2) Sign shall be in black typeface on white back­ground.
    (3) Sign wording shall and point size shall be as supplied by the bureau.
    (4) Typeface shall be bookman.

  2. If a sign no longer meets the outlined specifi­cations or is no longer readily legible, it will be replaced by the bureau.
Display Of Smog Check Licenses and Certifi­cates. Sign #14

Title 16 of the California Code of Regulations, section 3340.15(c) provides: The station, inspector, and/or repair technician licenses shall be posted prominently under glass or other transparent material in an area frequented by customers.

Posting Of Dealer’s Smog Check Station Prices. Sign #15

Title 16 of the California Code of Regulations, section 3340.15(d) provides as follows: The station shall post conspicuously in an area frequented by customers a list of price ranges for the specific activities for which it is licensed. The posted prices shall include the price charged by the station for inspections, and, if a separate price is charged for reinspections, the reinspection price. The station shall also post the inspection prices for vans and/or heavy-duty vehicles if those prices differ from the passenger car inspection price. If the station imposes an hourly labor charge for repairs, the hourly labor rate shall be posted. The price of issuance of a certificate of compliance or noncompliance charged by the bureau shall be posted separately from the price of the inspection and of the reinspection, if any.” Notice that this regulation does require labor rates to be posted if the station imposes an hourly labor charge for repairs; however, this applies only to the smog check operations.

Smog Check Test Only Sign. Sign #16

Title 16 of the California Code of Regulations, section 3340.16(b), provides as follows: A smog check test only station shall post conspicuously, in an area frequented by consumers, a notice to the ef­fect that the station is licensed to test vehicles only, and cannot make any required  diagnosis or repairs to a vehicle which has failed a smog check test.

Other Vehicle Sales Related Signs

No Cooling Off Period Without Cancellation Sign. Sign #17

In addition to notices required to be printed in every sales contract and lease, legislation designed to warn consumers that no cooling-off period exists mandates Sign #17. Vehicle Code section 11709.2 provides: Every dealer shall conspicuously display a notice not less than eight inches high and 10 inches wide, in each sales office and sales cubicle of a dealer’s established place of business where written terms of specific sale or lease transactions are dis­cussed with prospective purchasers or lessees, and in each room of a dealer’s established place of business where sale and lease contracts are regularly exe­cuted, which states the following:

THERE IS NO COOLING-OFF PERIOD UNLESS YOU OBTAIN A CONTRACT CANCELLATION OPTION

California law does not provide for a “cooling-off” or other cancellation period for vehicle lease or purchase contracts. Therefore, you cannot later cancel such a contract simply because you change your mind, decide the vehicle costs too much, or wish you had acquired a different vehicle. After you sign a motor vehicle purchase or lease contract, it may only be canceled with the agreement of the seller or lessor or for legal cause, such as fraud.

However, California law does require a seller to offer a 2-day contract cancellation option on used vehicles with a purchase price of less than $ 40,000, subject to certain statutory conditions. this contract cancellation option requirement does not apply to the sale of a motorcycle or an off-highway motor vehicle subject to identification under California law. see the vehicle contract cancellation option agreement for details.

Right To Inspect Used Vehicles Sign. Sign #18

Vehicle Code section 11709.1 provides as follows:

Every dealer who displays or offers one or more used vehicles for sale at retail shall post a notice not less than 8 inches high and 10 inches wide, in a place conspicuous to the public, which states the following:

“The prospective purchaser of a vehicle may, at his or her own expense and with the approval of the dealer, have the vehicle inspected by an independent third party either on or off these premises.”

Spanish / Foreign Translation Of Contract Sign. Sign #19

California Civil Code section 1632 provides for certain requirements whenever a dealer negotiates a sale or lease covered by Civil Code section 2982 (Conditional sale contracts) or the Vehicle Leasing Act primarily in the Spanish, Chinese, Korean, Vietnamese, or Tagalog languages. See discus­sion in the chapter in this Guide enti­tled “AUTOMOBILE SALES FINANCE ACT” under the topic “Spanish and Other Foreign Language Contract Requirements.” Civil Code section 1632 provides that under these circumstances a Spanish or other foreign language notice shall be con­spic­uously displayed to the effect that the Seller or Lessor is required to provide a translated contract or agreement in one of the five covered languages. If the Seller or Lessor does business at more than one location or branch, the requirements for the sign shall apply only with respect to the location or branch at which the foreign language is used.

Presale Availability of Warranty Sign. Sign #20

The federal law governing consumer warranties is the Magnuson-Moss Consumer Warranty Act. The Act requires that you make the terms of the any written warranty (including the manufacturer’s ) available to potential buyers prior to sale (including through electronic means under certain circumstances).  The dealer must either con­spicuously display the text of the written warranty (including through electronic means under certain circumstances) in close proximity to the product, or post signs in con­spicuous places advising that the warranties are available for inspection. Since Magnuson-Moss covers all written warran­ties, including new and used cars, F&I products (such as alarms) and parts and accessories, dealers should post the sign in several areas: new and used vehicle sales, F&I, the parts counter, and the service write-up area.

Availability of Service Bulletins. Sign #21

Dealers are required under California law to advice all prospective buyers and lessees of the availability of factory service bulletins.  For this purpose, the law recommends and authorizes the posting of Sign #21 in the showroom or other con­spicuous place.

If a dealer receives a service bulletin detailing an adjustment program, the law also requires the dealer to disclose the principal terms and conditions of the warranty adjustment program to any service depart­ment customer seeking repair of a condition covered by the program. Dealers should implement a system to ensure that such disclosure is always made.

Other State Mandated Signs

Sign Regarding Credit Card Request For Check Writing. Sign #22

When a customer writes a check, California law prohibits any policy which requires the presentation of a credit card (regardless of whether credit card numbers are recorded) as a condition to acceptance of the check. The law, however, does allow a credit card to be “requested” for purposes of identification, and as an indication of credit worthiness or financial re­sponsibility. Thus “requesting” is permitted, but “requiring” is barred. California Civil Code section 1725 provides that if a request for a credit card, is, or might ever be made, you must either train your employees requesting the credit card to inform all check writing customers that they are not required to display a credit card to write a check; or post the following notice in a conspicuous location in the un­obstructed view of the public within the premises where the check is being written, clearly and legibly: “Check writing ID: credit card may be requested but not required for purchases.”

Policy Concerning Refunds and Exchanges Sign. Sign #23

California Civil Code section 1723 provides as follows:

  1. Every retail seller which sells goods to the public in this state that has a policy as to any of those goods of not giving full cash or credit re­funds, or of not allowing equal exchanges, or any combination thereof, for at least seven days follow­ing purchase of the goods if they are returned and proof of their purchase is presented, shall con­spicuously display that policy either on signs posted at each cash register and sales counter, at each public entrance, on tags attached to each item sold under that policy, or on the retail seller’s or­der forms, if any. This display shall state the store’s policy, including, but not limited to, whether cash refund, store credit, or exchanges will be given for the full amount of the purchase price; the applica­ble time period; the types of merchandise which are covered by the policy; and any other conditions which govern the refund, credit, or exchange of merchandise.
  2. This section does not apply to food, plants, flowers, perishable goods, marked “as is,” “no returns accepted,” “all sales final,” or with similar language, goods used or damaged after purchase, customized goods received as ordered, goods not returned with their original package, and goods which cannot be resold due to health considera­tions.
  3. (1) Any retail store which violates this section shall be liable to the buyer for the amount of the purchase if the buyer returns, or attempts to return, the purchased goods on or before the 30th day after the purchase.
    (2) Violations of this section shall be subject to the remedies provided in the Consumers Legal Remedies Act (Title 1.5 (commencing with Section 1750) of Part 4).
    (3) The duties, rights, and remedies provided in this section are in addition to any other duties, rights, and remedies provided by state law

This law does not apply to the sale of vehicles be­cause they are used after purchase.

Cellular Telephone Activation Notice. Sign #24

Anyone retailing cellular telephones is required by Business and Professions Code section 17026.1 to post this sign in the area in each retail location where cellular telephones are displayed and purchased.

Grey Market Goods Signs. Sign #25

California Civil Code sections 1797.8, and follow­ing, deal with grey market goods. “Grey Market Goods” are defined in as consumer goods bearing a trademark and normally accompanied by an express written warranty valid in the United States of America which are imported into the United States through channels other than manufacturer’s authorized United States distributor which are not accompanied by the manufacturer’s express written warranty valid in the United States.  The law includes sale of grey market goods or lease of such goods for more than four months. California law further requires retail sellers of grey market goods to post a conspicuous sign at the product’s point of display and affixed to the product or the package with a conspicuous ticket, labeled, or tagged disclosing the various matters required by this statute.

Anti-Graffiti Warning. Sign #26

In addition to imposing restrictions on the sale of aerosol containers of paint to minors, Penal Code section 594.1 requires all retailers who sell or offer to sell aerosol containers of paint to post Sign #26.

Child Passenger Restraint Sign. Sign #27

Vehicle Code section 27365 requires every car rental agency in California to post Sign #27 in a place conspicuous to the public in each established place of business.

This law also requires that every such agency shall have available for, and shall, upon request, provide for rental to, adults traveling with children under the age of 6 or weighing less than 60 pounds, child passenger seat restraint systems meeting appli­cable federal motor vehicle safety standards on the date of the rental transaction, in good and safe con­dition, with no missing original parts and not older than five years.

Although the term “car rental agency” is not spe­cifically defined in the Vehicle Code section 508 of the code defines a renter as “A person who is en­gaged in the business of renting, leasing or bailing vehicles for a term not exceeding four months and for a fixed rate or price.” It is uncertain whether a dealer who loans a “courtesy car” to a service cus­tomer without charge is required to comply with the signage and availability requirements, but conserva­tive dealers may wish to comply with the require­ment in all circumstances.

Rental Company Damage Waiver Signs. Sign #28

If your dealership is in the business of renting pas­senger vehicles to the public, then California Civil Code section 1939.09, subdivisions (c)(1)-(3) must be complied with. They provide in part:

c. (1) A rental company that offers or provides a damage waiver for any consideration in addition to the rental rate shall clearly and conspicuously disclose the following information in the rental contract or holder in which the contract is placed and, also, in signs posted at the location where the renter signs the rental contract, and, for renters who are enrolled in the rental company’s membership program, in a sign that shall be posted in a location clearly visible to those renters as they enter the location where their reserved rental vehicles are parked or near the exit of the bus or other conveyance that transports the enrollee to a reserved vehicle:

(A) the nature of the renter’s liability, such as liability for all collision damage regardless of cause,

(B) the extent of the renter’s liability, such as liability for damage or loss up to a specified amount,

(C) the renter’s personal insurance policy or the credit card used to pay for the vehicle rental transaction may provide coverage for all or a portion of the renter’s potential liability,

(D) the renter should consult with his or her insurer to determine the scope of insurance coverage, including the amount of the deductible, if any, for which the renter is obligated,

(E) the renter may purchase an optional damage waiver to cover all liability, subject to whatever exceptions the rental company expressly lists that are permitted under subdivision (b), and

(F) the range of charges for the damage waiver.

(2) In addition to the requirements of paragraph (1), a rental company that offers or provides a damage waiver shall orally disclose to all renters, except those who are participants in the rental company’s membership program, that the damage waiver may be duplicative of coverage that the customer maintains under his or her own policy of motor vehicle insurance. The renter shall acknowledge receipt of the oral disclosure near that part of the contract where the renter indicates, by the renter’s own initials, his or her acceptance or declination of the damage waiver. Adjacent to that same part, the contract also shall state that the damage waiver is optional. Further, the contract for these renters shall include a clear and conspicuous written disclosure that the damage waiver may be duplicative of coverage that the customer maintains under his or her own policy of motor vehicle insurance.

(3)(A) The following is an example, for purposes of illustration and not limitation, of a notice fulfilling the requirements of paragraph (1) for a rental company that imposes liability on the renter for collision damage to the full value of the vehicle:[see sample sign in previous section.]

Display of Sales Tax Permit. Sign #29

Each sales tax permit issued for each place of business within the state shall at all times be con­spicuously displayed at the place for which issued.  

Posting of Insurance Licenses. Sign #30

Insurance Code section 1725 provides: Every li­cense to act as a fire and casualty broker‑agent shall be prominently displayed by the holder thereof in his or her office in a manner whereby anyone may read­ily inspect it and ascertain both its currency and the capacity in which its holder is licensed to act.

Posting of Dealer License. Sign #31

Vehicle Code section 11709(a) provides as fol­lows: A dealer’s established place of business and other sites or locations as may be operated and maintained by the dealer in conjunction with his or her established place of business, shall have posted, in a place conspicuous to the public in each and every location, the license issued by the department to the dealer and to each salesperson employed by the dealer and shall have erected or posted thereon signs or devices providing information relating to the dealer’s name and the location and address of the dealer’s established place of business to enable every person doing business with the dealer to identify him or her properly.

Every such sign erected or posted on an established place of business, shall have an area of not less than two square feet per side displayed and shall contain lettering of sufficient size to enable the sign to be read from a distance from at least 50 feet. This section shall not apply to a dealer who is a wholesaler involved for profit only in the sale of ve­hicles between licensed dealers.

Display of Salesperson License. Sign #32

Vehicle Code section 11812 provides in part as follows:

  1. A vehicle salesperson licensed under this article shall, at the time of employment, deliver his or her salesperson’s license to his or her employing dealer for the posting of the salesperson’s license or a true and exact copy of the salesperson’s license in a place conspicuous to the public at each location where he or she is actually engaged in the selling of vehicles for the employing dealer.
  2. The license, or a true and exact copy of the license, shall be displayed continuously at each location where he or she is actually engaged in the selling of vehicles during the employment. If a vehicle salesperson’s employment is terminated, the license shall be returned to the salesperson and all copies of the license used by the dealer for posting or display shall be destroyed by the dealer.
Display of Business License. Sign #33

There is required to be posted or displayed the re­ceipt or certificate showing evidence of a business’ payment of the “Business license tax receipt”.  

Contract for Parking or Storage Sign. Sign #34

If you issue a parking lot gate-ticket or other device meant to be a contract for parking or storage of vehicles, then California Civil Code section 1630 would apply. It provides as follows:

Except as provided in section 1630.5, a printed contract of bailment providing for the parking or storage of a motor vehicle shall not be binding, either in whole or in part, on the vehicle owner or on the person who leaves the vehicle with another unless the contract conforms to the following:

  1. “This contract limits our liability‑read it” is printed at the top in capital letters of 10‑point type or larger.
  2. All the provisions of the contract are printed legibly in eight‑point type or larger.
  3. Acceptance of benefits under a contract in­cluded within the provisions of this section shall not be construed a waiver of this section, and it shall be unlawful to issue such a contract on condi­tion that provisions of this section are waived.

A copy of the contract printed in large type, in an area at least 17 x 22 inches, shall be posted in a conspicuous place at each entrance of the parking lot.

Nothing in this section shall be construed to pro­hibit the enactment of city ordinances on this sub­ject that are not less restrictive, and such enactments are expressly authorized.

Public Parking Prohibited Sign. Sign #35

Vehicle Code section 22658(a) provides a non-exclusive means of being allowed to tow away vehi­cles improperly parked on private property: the owner or person in lawful possession of private property… may cause the removal of a vehicle parked on the property to a storage facility that meets the requirements of subdivision (n) under any of the following circumstances:

  1. There is displayed, in plain view at all entrances to the property, a sign not less than 17 inches by 22 inches in size, with lettering not less than one inch in height, prohibiting public parking and indicating that vehicles will be removed at the owner’s expense, and containing the telephone number of the local traffic law enforcement agency and the name and telephone number of each towing company that is a party to a written general towing authorization agreement with the owner or person in lawful possession of the property. The sign may also indicate that a citation may also be issued for the violation.
  2. The vehicle has been issued a notice of parking violation, and 96 hours have elapsed since the issuance of that notice.
  3. The vehicle is on private property and lacks an engine, transmission, wheels, tires, doors, windshield, or any other major part or equipment necessary to operate safely on the highways, the owner or person in lawful possession of the private property has notified the local traffic law enforcement agency, and 24 hours have elapsed since that notification.
  4. The lot or parcel upon which the vehicle is parked is improved with a single-family dwelling.
Storage Charges for Towed Vehicles Sign. Sign #36

California Civil Code section 3070(d)(1) provides that any person who improperly causes a vehicle to be towed or removed in order to create or acquire a lienhold interest enforceable under Chapter 6.5 of the California Civil Code, or who violates any of the provisions of that chapter shall forfeit all claims for towing, removal, or storage, and shall be liable to the owner or lessee of the vehicle for the cost of re­moval, transportation, and storage, damages result­ing from the towing, removal transportation, or stor­age of the vehicle, attorneys’ fees, and court costs.

Civil Code section 3070(d)(2)(E) provides that improperly causing a vehicle to be towed or re­moved includes: Failure by the owner or operator of a facility used for the storage of towed vehicles to display, in plain view at all cashiers’ stations, a sign not less than 17 x 22 inches in size with lettering not less than one inch in height, disclosing all storage fees and charges enforced, including the maximum daily storage rate.” It appears that this statute, how­ever, only applies if the dealership caused the vehicle to be towed or removed “in order to create or acquire a lienhold interest.

Exit Signs. Sign #37

8 California Code of Regulations section 3216 requires the posting of exit or directional signs, or both, at every exit door, at the intersection of corridors, at exits, stairways or ramps, and at such other locations at intervals as are necessary to provide the occupants with knowledge of the various means of egress available. The signs need not be provided for rooms or buildings having an occupant load of 50 or less and when approved, the main exterior exit doors obviously and clearly identifiable as exits. The Regulation further gives specifications concerning the dimensions of the signs and their luminance.

Off Site Vehicle Display. Sign #38

If a dealer engages in off premises display of ve­hicles at shopping centers, fairs, and the like, as permitted by Vehicle Code section 11709(b), 13 California Code of Regulations section 270.08 provides for the posting of a sign on the vehicle or vehicles or in close proximity thereto, printed in letters of not less than three inches in height, which shall show the dealer’s name, loca­tion and address of his or her established place of business and the following statement: “No sales permitted, or deposits accepted at this location.”

Lien Sale in Ten Days. Sign #39

If a dealer conducts a lien sale of a vehicle worth less than $2,500, Civil Code section 3072(f) requires that for a period of at least ten days before the sale, a sign be posted in the business office or at such other site where the lien sale is to take place.

No Smoking. Sign #40

Labor Code section 6404.5 completely bans all smoking in the workplace, with the exception of outside exhausted breakrooms. Employers will not be guilty of knowingly permitting smoking by non-employees if there are posted at all entrances to the facility one of two alternative “no smoking” signs, as shown above.

Fuel Economy Guide Booklet. Sign #41.

Federal law requires dealers to display the EPA’s Fuel Economy Guide booklet in the same manner it displays vehicle brochures for new vehicles.  

Towing Fees and Access Notice. Sign #42.

Repair dealers that are involved in charging for towing and/or towing related storage, even in the context of passing through a sublet tow charge for services ordered by the vehicle owner or insurer, must comply with the requirements of California Vehicle Code section 22651.07. These requirements include conspicuously posting a “Towing Fees and Access Notice” sign; providing a copy of the notice to customers upon request; and providing a customer with an itemized invoice containing detailed information related to the towing services involved. Dealers who insist that customers or insurers arrange and pay for their own tow charges directly are not subject to the requirements of this law.

Battery Fee and Refundable Deposit. Sign #43.

Health and Safety Code section 25215.2 provides that a dealer shall charge a refundable deposit to each person who purchases certain types of replacement lead-acid batteries and who does not simultaneously provide the dealer with a used lead-acid battery of the same type and size for each such battery purchased. In addition to other requirements on that section, dealers shall post a written notice that is clearly visible in the public sales area of the establishment, or include on the purchaser’s receipt, the language quoted in the Table of Public Signs section above.  Note, however, that the notice requirements do not apply to (1) a person whose ordinary course of business does not include the sale of lead-acid batteries or (2) a person that does not sell lead-acid batteries directly to consumers, such as over-the-counter, but instead removes nonfunctional or damaged batteries and installs new lead-acid batteries as a part of an automotive repair dealer service.  

PRACTICAL TIP

Sign Vendors. The Bureau of Automotive Re­pair (B.A.R.) no longer maintains a list of sign vendors who sell various B.A.R. signs. The B.A.R. recommends consulting with commercial sign vendors from the telephone directory. Some vendors’ signs have a place for hourly labor rates. It is not recommended that you post an hourly rate. Additional information on this topic is accessible in the CNCDA Service Drive Compliance Manual, accessible on CNCDA’s website (www.cncda.org) under the “CNCDA Comply” tab.

 

Sales and Use Tax

Overview

California’s sales and use tax laws have an impact upon virtually every area of dealership operations, affecting everything from vehicle sales to shop supplies consumed by the service department.

By managing operations wisely and with close attention to the various applicable laws, a dealer can manage sales tax liabilities in an efficient manner.

California law imposes sales and use taxes upon retailers for the privilege of selling or leasing tangible personal property at retail. However, the law gives retailers the right to seek reimbursement from customers. Civil Code section 1656.1 creates a presumption that the buyer agreed to reimburse the seller under any of the following circumstances: (1) the sales agreement expressly provides for the addition of sales tax reimbursement; (2) sales tax reimbursement is shown on the sales check; or (3) the retailer by price tag, advertisement, other printed material directed to purchasers, or posted notice informs purchasers that sales tax will be added.

This chapter examines various aspects of sales and use tax laws, including policies of the State Department of Tax and Fee Administration. This chapter should be taken as an overview of the laws governing sales and use taxes as they apply to vehicle dealers in California, but in no case should dealers rely upon this chapter alone in managing their specific sales and use tax requirements. Questions regarding specific interpretations of sales and use tax laws should be reviewed with competent tax attorneys and accountants.

California Department of Tax and Fee Administration (CDTFA)

The California Department of Tax and Fee Administration (“CDTFA”) is the agency responsible for collecting sales and use taxes. For sales and use tax purposes, the CDTFA is the successor agency of the Board of Equalization (BOE), which was stripped of most of its authority by the legislature in 2017. Since the CDTFA primarily consists of prior BOE staff and it inherited BOE resources, the BOE rulings discussed in this Chapter are still instructive on how the CDTFA would approach issues involving sales and use tax law in California.

CDTFA Publications and Audit Manual

The CDTFA regularly updates two major publications specifically relating to dealership operations that are available free of charge: Publication 34 (Motor Vehicle Dealers), and Publication 25, (Auto Repair Garages). The publications are available online at www.cdtfa.ca.gov/formspubs/pub34.pdf  and www.cdtfa.ca.gov/formspubs/pub25.pdf. Although these and other CDTFA publications are very helpful reference guides that each dealership should have on hand, they do not carry the force of laws or regulations and may not be relied upon in case of conflict with laws or regulations.

The CDTFA also publishes an Audit Manual, which provides additional helpful information on sales and use tax issues. Chapter 6 of the Audit Manual entitled “Vehicle, Vessel, and Aircraft Dealers” is a particularly helpful resource on tax issues impacting dealerships. The Audit Manual can be accessed at https://www.cdtfa.ca.gov/taxes-and-fees/staxmanuals.htm

Sales and Use Tax Permits

Retailers are required to obtain a free permit from the Department of Tax and Fee Administration authorizing them to collect and remit sales and use tax. If a dealer has more than one place of business (located on different premises), a separate permit may be needed for each location. However, in some instances it may be possible to obtain a consolidated permit for multiple business outlets if listing all outlets on the initial application.

Filing Returns

Pursuant to Revenue & Taxation Code section 6471, any person whose estimated measure of tax liability averages $50,000 or more per month is required to make monthly tax prepayments to the Board in addition to quarterly filings. All quarterly filings must be made and the taxes paid in full by the last day of the month succeeding each quarter. Prepayments must be made in one of the manners that follows, depending upon whether the dealer will use the current or previous year’s accounting records:

  • For those using the current year’s accounting records:
    • In the first, third, and fourth calendar quarters, prepay at least 90% of the amount of state and local tax liability for each of the first two months of the quarter;
  • In the second calendar quarter, make a first prepayment of 95% of the amount of state and local tax liability for the first month of the quarter, and a second prepayment of either;
    • 95% of the amount of state and local tax liability for the second month of the quarter plus 95% of the amount of state and local tax liability for the first 15 days of the third month of the quarter, or
    • 95% of the amount of state and local tax liability for the second month of the quarter, plus 50% of 95% of the state and local tax liability for the second month of the quarter
  • Those businesses using the previous year’s accounting records (which requires having been in business during the entire previous year) may make prepayments as follows:
    • For the first, third and fourth quarters, pay an amount equal to one third of the tax liability reported on the return(s) filed for the quarterly period of the previous year, but multiplied by the currently applicable state and local tax rate.
    • For the second quarter, make a first prepayment in an amount equal to 1/3 of the tax liability reported, and a second prepayment in an amount equal to 50% of the tax liability reported on the return(s) filed for the previous year’s quarter, multiplied by the current applicable state and local tax rate
  • For both methods of prepayment, payment should be made and report submitted to the Board of Equalization as follows:
    • For the first, third and fourth quarters, by the 24th of each of the first two months of the quarter.
    • For the second quarter:
      • A first prepayment and report by the 24th of the second month covering the first month of the quarter.
      • A second prepayment and report by the 24th of the third month covering the entire second quarter and the first 15 days of the third month of the quarter.

Penalties for Overdue Filings and Payments

  • Late Prepayment Penalties:
    • The penalty for late monthly prepayments is 6% of the prepayment amount, if received before the last day of the month succeeding the quarter in which the prepayment is due.
    • If the prepayment is paid later than that date, but the quarterly payment and return are paid and filed in a timely manner, the penalty increases to 6% of 90% of the tax liability for each of the periods during that quarterly period for which the prepayment was not made.
    • For both of these situations, the penalty for failing to make a payment due to negligent or intentional disregard for these requirements is increased to 10%.
  • Late Quarterly Payment Penalties:
    • The penalty for late quarterly payments is 10% of the amount of taxes, exclusive of prepayments, with respect to the period for which the return is required.
    • The penalty for knowingly collecting sales or use tax reimbursement and failing to make a timely remittance of sales or use tax reimbursement is 40% of the amount not timely remitted, unless the taxpayer can demonstrate that the cause of the late payment was reasonable and outside of the taxpayer’s control. This tough standard and steep penalty makes on-time tax remittance crucial, and dealers should ensure that the appropriate employees remit taxes on time. Dealers should also establish a sufficient support system to ensure that the mistake of a single employee does not put the dealership at risk of a major penalty.

Electronic Filing Requirement

Any person whose average monthly tax payments exceed $10,000 is required to remit sales and use tax electronically. If filed later than the applicable deadlines (discussed above), that person is liable for a 10% penalty on the amount of taxes, exclusive of prepayments, due for that period. A person who remits a tax payment in a non-electronic manner when required to do so electronically is subject to a penalty of 10% of the taxes incorrectly remitted; for prepayments incorrectly submitted, however, the penalty is reduced to 6% of the prepayment amount incorrectly submitted. These penalties are in addition to those discussed above with regard to late payment. Dealers can establish an online filing account with the Department of Tax and Fee Administration for simplified electronic filing and payment by following the instructions found online at: www.cdtfa.ca.gov/services/online-filing-faq.htm. Questions regarding Electronic Funds Transfers can be directed by telephone to the CDTFA’s Customer Service Center at 1-800-400-7115 (8:00 a.m.-5:00 p.m. weekdays).

Audits

If the Department of Tax and Fee Administration is not satisfied with a tax return, it may compute and determine the amount required on the basis of facts in its possession, or that it may gather. This “fact gathering” may take place through an audit, which the CDTFA may undertake without any particular reason. While no dealer looks forward to being audited, all dealers must be prepared for handling an audit, should that day come. Dealers can minimize the inevitable inconvenience of an audit by keeping meticulous records and adhering to applicable tax rules. Auditors have the right to check all aspects of a dealer’s practice, but have primary goals of determining the following about the return filed :

  • Whether the dealer reported all gross receipts from sales of tangible personal property and taxable labor and services;
  • Whether the dealer reported the cost of all business equipment and supplies purchased without tax either from out-of-state vendors or for resale;
  • Whether the dealer properly claimed deductions;
  • Whether the dealer properly allocated local taxes;
  • Whether the dealer used the correct rate of tax when reporting sales in special tax districts; and
  • Whether the dealer properly applied tax to his sales and uses of tangible personal property.

The Auditor will contact the dealer and schedule an audit appointment, specifying the materials and documents the dealer must provide, and giving the dealer two to three weeks to collect the necessary information. During the audit, the Auditor will perform an investigation into the dealer’s records and determine whether the dealership paid too much, too little, or the correct amount of sales and use tax. Based on the investigation, the CDTFA will prepare a letter stating that the correct amount was paid, prepare a Notice of Determination (Billing), or prepare a Notice of Refund. For more information on the audit process, consult CDTFA Publication 76. Dealers can prepare for a sales and use tax audit by familiarizing themselves with Chapter 6 of the CDTFA Audit Manual for Vehicle, Vessel, and Aircraft Dealers.

Managed Audit Program

As an alternative to a full audit, the Legislature granted the Department of Tax and Fee Administration the authority to use a Managed Audit Program (MAP) in which a taxpayer can perform an audit of their own books and records, with limited guidance from the CDTFA, in order to determine any tax deficiencies. In return for performing the managed audit, the taxpayer will be liable for only one-half of the interest usually imposed under a regular audit. If the CDTFA offers you this option, you may wish to consider this program as a potential means to minimize additional interest liability.

Appealing an Audit

If your dealership is audited by the Department of Tax and Fee Administration and you dispute the audit findings, the following progressive steps are generally available to appeal such findings:

  1. Consultation with the auditor: (a) during the audit, and (b) after completion of the audit.
  2. Consultation with the auditor’s field supervisor.
  3. Discussion before a local Board office representative.
  4. Petition for redetermination: (a) presentation of additional documents to audit staff; (b) conference before Appeals Review section attorney or auditor; and (c) hearing before Board of Equalization members.
  5. Payment and claim for refund.
  6. Court proceedings.

The Board also maintains an alternative settlement program for civil tax matters that is designed to reduce the time and expense involved in the normal appeals process. The Board’s staff can negotiate a proposed settlement agreement that differs from the original billing notice. That agreement is subject to approval by the Attorney General’s office. Only active cases for which a petition for redetermination or claim for refund has been filed can qualify for settlement consideration.

Record Keeping Requirements

Pursuant to Revenue and Taxation Code section 7053, the Department of Tax and Fee Administration requires retailers to keep adequate records showing:

  • Gross receipts from sales or leases of tangible personal property, whether the retailer considers the receipts as taxable or non-taxable;
  • All deductions allowed by law and claimed in filing returns; and
  • The total purchase price of all tangible personal property purchased for sale, consumption, or lease.

These records must include:

  • The normal books of account;
  • All bills, receipts, invoices, repair orders, vehicle orders, contracts, or other documents of original entry supporting the entries in the books of account; and
  • All schedules or working papers used in connection with the preparation of tax returns.

Documentation supporting the timely payment of tax on the purchase price of leased property must be maintained at least until the property is no longer in rental service.

NOTE

On Report of Sale Records: The Board of Equalization, the state agency previously in charge of sales and use taxes, voiced concern in the past regarding Dealer maintenance of Report of Sale Slips registered with the DMV, particularly when sales are subsequently voided. Due to this concern, during an audit, the Department of Tax and Fee Administration checks the Dealer’s records against the DMV’s list of recorded Reports of Sale. If a Dealer is missing a Report of Sale record regarding a sale originally reported to the DMV, the CDTFA takes the position that the missing record represents an undocumented sale, and will attribute an average vehicle cost to which it will apply sales tax. The DMV does not keep records of voided transactions, but only retains the original Report of Sale. To avoid such an occurrence, Dealers are strongly advised to keep complete records of voided transactions in case of an audit.

Application of Sales and Use Tax Laws

California’s basic sales and use tax rate was temporarily increased in 2013 by 0.25% to 7.5%. This increase expired on December 31, 2016. The base rate decreased to 7.25% effective January 1, 2017, broken out as shown below:

RateJurisdictionPurpose
3.6875%StateState General Fund
0.25%StateState General Fund
0.50%StateLocal Public Safety Fund (Criminal Justice)
0.50%StateLocal Revenue Fund (Health and Social Services)
1.0625%StateLocal Revenue Fund (2011 Realignment)
1.00%LocalCity and County Operations
0.25%LocalCounty Transportation Funds

In addition to this base rate, many counties have increased their rates by enacting additional district taxes, usually to support public transportation agencies. Dealers can look up the current sales and use tax rates in effect in a particular jurisdiction on the CDTFA website at: www.cdtfa.ca.gov/taxes-and-fees/rates.aspx.

District Taxes

The sales and use tax rate that applies to the sale or lease of a vehicle will depend on where the vehicle is registered. Different counties (and even some cities) have raised their sales tax rates well above 7.25% by enacting district taxes. However, dealers located within special taxing districts are not required to collect district tax on sales made in their district to buyers who register such vehicles at an address that is not located within a special taxing district. In such cases, the dealer must obtain a signed declaration from the purchaser under penalty of perjury stating that the vehicle will be registered to, operated from, and stored at an address outside the special taxing district. Sample declaration forms for passenger and commercial vehicles can be found online in the CDTFA forms database at: www.cdtfa.ca.gov/formspubs/forms.htm.

The California Code of Regulations further states that any seller claiming that a certain transaction is exempt from district taxes “must retain in his records the declaration executed in the prescribed form. If the exemption claimed relates to the sale of a vehicle, the seller also must retain in his or her records a copy of either the Department of Motor Vehicles report of sale or other documentary evidence showing the out-of-district address to which the vehicle is registered.”

Tax Calculations     

Retailers are required to utilize sales and use tax tables approved by the Department of Tax and Fee Administration. However, because tax tables apply only to transactions under $100 (adjusted with CPI), the CDTFA allows retailers to use the following formula:

“Reimbursement on sales prices in excess of those shown in the schedules may be computed by applying the applicable tax rate to the sales price, rounded off to the nearest cent by eliminating any fraction less than one-half cent and increasing any fraction of one-half cent or over to the next higher cent.”

Amounts Subject to Sales Tax

The selling price of a vehicle is subject to sales tax. “Sales price” is defined as “the total amount for which tangible personal property is sold or leased or rented…without any deduction on account of any of the following: (1) the cost of the property sold, (2) the cost of materials used, labor or service cost, interest charged, losses, or any other expenses, (3) the cost of transportation of the property, except as excluded by other provisions of this section.”

Accordingly, the total charge, including installation labor charges, for options installed by a dealer on a vehicle prior to its delivery (including, but not limited to: alarms, air conditioners, and stereos) are subject to tax. Document processing charges are also taxable. Many intangible items sold in the F&I Office, however, are not considered subject to sales tax as long as they are separately itemized. The following chart provides an easy reference for common items:

ItemTaxable?
Document Processing ChargeYes
Smog Fee Paid to SellerYes
Hard Accessories (plus installation labor)Yes
Surface Protection ProductsYes
Electronic Vehicle Registration or Transfer ChargeNo
Service ContractsNo
GAP ContractsNo
Contract Cancellation Option AgreementNo
VLF, Tire, Smog Certification, and Registration FeesNo

Taxes also apply to vehicles sold at auction, even when the purchaser does so without ever personally receiving the property or where the bidder is to be immediately reimbursed by the party taking possession of the vehicle. Leased vehicles are considered as continuing sales and are also subject to tax, as discussed in further detail below.

Manufacturer rebates cannot be deducted from the amount subject to tax. However, the vast majority of factory-to-dealer incentives that enable a dealer to sell a car for a lower price effectively reduce the amount subject to tax. The exception to the general rule applies when an incentive program specifically requires a dealer to reduce the price of a vehicle by the specific incentive amount. In such cases, that incentive amount would be subject to sales tax. In an audit situation, the Department of Tax and Fee Administration would expect the dealer to have retained documentation showing that the program does not require a specific price reduction, highlighting the importance of retaining documentation concerning all incentive program payments.

Trade-In Vehicles

A dealer’s purchase of a customer’s vehicle is not subject to sales tax, since it is acquired for resale. However, when a trade-in is accepted on a purchase, the allowance for the trade-in cannot be excluded from the amount on which tax is based.

Courtesy Deliveries

A California dealer who, at the manufacturer’s request, makes a courtesy delivery of a vehicle sold by an out-of-state dealer is considered to have made a retail sale under Revenue and Taxation Code section 6007. The dealer must therefore collect sales tax on the transaction. Similarly, a courtesy delivery of a vehicle in a California dealer’s own inventory to the customer of an out-of-state dealer is also considered a retail sale subject to tax under section 6007.

Courtesy deliveries can also come up in the context of Internet sales. A courtesy delivery customer may try to claim a sales tax credit for sales tax paid to an out-of-state dealer who sold the customer the vehicle. Exercise caution in such circumstances. The potential problems with such a scenario occurred in one real world example where a customer ordered a Corvette via the Internet from a Florida dealer to be picked up at a California dealership. The Florida dealer collected the sales tax and advised the customer to go to the local California State Board of Equalization (BOE) office, obtain a California sales tax return, and claim a credit for the sales tax paid to the Florida dealer.

The BOE, however, advised the California dealer not to recognize the customer’s claim of a credit, and to collect sales tax. The BOE’s advice was based upon its interpretation of California Revenue and Taxation Code section 6007, which provides in relevant part: “…the person making the delivery shall be deemed the retailer of that property….” The BOE advised the California dealer that it would be liable for sales tax not collected from the customer and remitted to BOE (now the Department of Tax and Fee Administration).

Drop Shipments

 If a dealer makes drop shipments to consumers in California on behalf of out-of-state retailers, the dealer is not liable for sales and use tax if the out-of-state retailer holds (or is required to hold) a California seller’s permit or a Certificate of Registration-Use Tax. Otherwise, unless the sale and use of the vehicle are exempt from taxation, drop shippers must pay sales or use tax on the retail selling price of the vehicle.

Dealers should note that the special calculation provisions of Department of Tax and Fee Administration Regulation 1706(c)(2) do not apply to drop shipments of vehicles. If a California customer is purchasing property for resale, drop shippers are not liable for tax if they obtain a valid resale certificate from the California customer.

Internet Sales

Sales of tangible goods made via the Internet to California purchasers should be taxed in the same manner as a sale made at a dealership. If the sale is made for delivery outside of California, however, the transaction may not be subject to California sales tax. Take note of the discussion concerning out-of-state sales of vehicles, below.

Resale Certificates

Dealers should be aware that the Department of Tax and Fee Administration actively enforces regulations relating to resale certificates. Under Sales and Use Tax Regulation 1668, the burden of proving that sale of tangible personal property is not at retail is upon the seller, unless the seller accepts in a timely manner a certificate from the purchaser stating that the property is being purchased for resale. If the certificate is taken in good faith from a person engaged in the business of selling tangible personal property that holds a California seller’s permit, the certificate relieves the seller from liability for any sales tax and the duty of collecting any use tax.

To be timely, a resale certificate must be obtained before the purchaser is billed for the property being sold, or within the dealer’s normal billing and payment cycle, or any time at or prior to the delivery of the property to the purchaser. If a dealer fails to obtain a resale certificate in a timely manner, the dealer cannot later obtain one to apply retroactively. Under such circumstances, the dealer will be liable for the tax unless the dealer can present satisfactory evidence that the specific property sold met one of the following conditions:

  1. The property was in fact resold by the purchaser and was not used by the purchaser for any purpose other than retention, demonstration, or display while the purchaser held it for sale in the regular course of business;
  2. The property is being held for resale by the purchaser and has not been used by the purchaser for any purpose other than retention, demonstration, or display while the purchaser held it for sale in the regular course of business;
  3. The property was consumed by the purchaser and tax was reported directly to the CDTFA by the purchaser on the purchaser’s sales and use tax return; or
  4. The property was consumed by the purchaser and tax was paid to the CDTFA by the purchaser pursuant to an assessment against or audit of the purchaser developed either on an actual basis or test basis.

If a dealer sells a vehicle to a purchaser who is not regularly engaged in selling or leasing vehicles, a dealer should accept a resale certificate only if it contains a statement that the specific vehicle is being purchased for resale in the regular course of the purchaser’s business. Dealers should note, however, that under Sales and Use Tax Regulation 1566(b), a resale certificate will not be honored by the CDTFA and tax will be due if the person named as a purchaser on the resale certificate is not named on the dealer’s report of sale and application for registration.

Sales and Use Tax Regulation 1668(b) provides a description of the minimum requirements for a resale certificate form and should be closely followed by dealers to avoid potential issues. Appendix A of Regulation 1668 provides a model for a general resale certificate. Appendix B provides a model form specifically for the auto body repair and painting industry. However, any document obtained in a timely manner from the purchaser which contains the following information can serve as a resale certificate:

  1. The signature of the purchaser (or purchaser’s agent or employee).
  2. The name and address of the purchaser.
  3. The number of the seller’s permit held by the purchaser.
  4. A statement that the property described in the document is purchased for resale. The document must contain the phrase “for resale”. (The use of phrases such as “exempt”, “non-taxable”, or “taxable=no” should not be used). The regulation specifically disallows sellers to rely on purchase orders that merely designate $0 as the amount of tax to be charged, or that fail to provide any statement as to the taxability of items purchased. The property to be purchased under the certificate must be described either by an itemized list of the particular property to be purchased for resale, or by a general description of the kind of property to be purchased for resale.
  5. The date the document was signed.

The regulation does allow a purchaser to issue a “blanket” resale certificate to apply to a series of transactions, if the certificate provides a general description of the items to be purchased.

Special Requirement for Auto Auction Resale Certificates: Sales and Use Tax Regulation 1169.5 provides a rebuttable presumption that a vehicle purchased at an auto auction is purchased at retail (and subject to sales tax). The presumption may be rebutted by taking a resale certificate from any of the following entities, bearing the applicable occupational license or registration number:

  1. An entity that certifies it is licensed, registered, regulated, or certificated under the Health and Safety Code or the Vehicle Code as a dealer or dismantler.
  2. An entity that certifies it is licensed, registered, regulated, or certificated under the Business and Professions Code as an automotive repair dealer, or is qualified as a scrap metal processor as described in the Vehicle Code.
  3. An entity that certifies it is licensed, registered, regulated, certificated, or otherwise authorized by another state, country, or jurisdiction to do business as a dealer, dismantler, automotive repairer, or scrap metal processor.

Dealers should ensure that the resale certificates kept on file at each auto auction contain the required occupational license or registration numbers, and that the auto auction does not allow entry to non-licensed or non-registered individuals.

NOTE

Regarding Sale Of Vehicles On Hold For Resale Basis: Under California Vehicle Code section 11713.1(f), a dealer is prohibited from purchasing for resale any new vehicle of a line-make for which the dealer does not hold a franchise, subject to certain specific exceptions. Given this prohibition, a dealer selling a new vehicle to another dealer not franchised to sell the type of vehicle purchased should be careful to have documentation that the sale qualifies for one of the limited “hold for resale” exceptions (i.e. mobile home; commercial coach; off-highway motor vehicle; manufactured home; new vehicle substantially altered by a converter; commercial vehicle with gross vehicle weight rating of more than 10,000 pounds; or a vehicle purchased for export outside the United States) if sales tax is not being paid based upon a resale certificate obtained from the purchasing dealer. Without this documentary evidence, the selling dealer’s acceptance of the resale certificate would probably not be in good faith—a requirement to avoid tax liability.

The Department of Tax and Fee Administration’s Audit Manual contains a discussion in the Vehicle, Vessel, and Aircraft Dealers chapter that provides further guidance on the treatment of transactions on a hold-for-resale basis. Section 0601.50 of the Audit Manual provides:

The Vehicle Code prohibits a dealer-broker from purchasing a new motor vehicle for resale of a line-make for which the dealer-broker does not hold a franchise. This violation of the dealer’s license would provide sufficient cause to disallow acceptance of a resale certificate in good faith. New car dealers should be advised not to accept a resale certificate for this type of transaction. The violation of Vehicle Code section 11713.1 is sufficient to overcome the presumption of a good faith acceptance of a resale certificate, whether or not it contains a statement that the specific vehicle is being purchased for resale in the regular course of business.

When these types of transactions are encountered in audits of franchised dealers, CDTFA-1164 should be prepared for questionable transactions, e.g., a Ford dealer accepting a resale certificate for the purchase of a new Ford vehicle from a dealer not franchised to sell Ford vehicles.

Except for those specific types of transactions mentioned in the Note above, it is improper to accept a resale certificate when selling a new motor vehicle to another dealer who is not also franchised to sell that line-make. Unless the transaction is a true dealer-trade (Ford dealer to Ford dealer), or you can document that a new vehicle was sold to a bona fide leasing company and in fact leased, sales tax should be collected and remitted, or you will face an audit chargeback and risk a DMV investigation.

Availability of Sales Tax Refunds in Unwind Situations

Dealers should be aware that a refund of sales tax can be obtained as a result of the rescission (“unwind”) of a contract pertaining to the sale of a motor vehicle. However, to obtain such a refund or sales tax credit, the Department of Tax and Fee Administration, based upon California Revenue and Taxation Code section 6011 and Sales and Use Tax Regulation 1655, takes the position that the customer must receive a full refund of the “sales price” of the motor vehicle (including the portion designated as sales tax) and the customer, in order to obtain the refund or credit, is not required to purchase other property at a price greater than the amount charged for the returned property.

Although Sales and Use Tax Regulation 1655 does allow an amount to be withheld from the refunded sales price for “rehandling and restocking costs,” those costs may not exceed the actual costs of rehandling and restocking the vehicle, and are specifically defined not to include compensation for “increased overhead costs because of the return, for refinishing or restoring the property to saleable condition where the necessity therefore is occasioned by customer usage, or for any expense prior to the sale.” However, in lieu of using the actual cost of each transaction, the amount withheld for rehandling and restocking may be a percentage of the sales price determined by the average cost of rehandling and restocking returned merchandise during the previous accounting cycle (generally one year). If the seller elects to withhold rehandling and restocking amounts based on a percentage of sales price, however, the seller is bound by that election for the entire accounting cycle for which the election is made and must apply that percentage in lieu of actual cost during that period on all returned vehicle transactions for which rehandling and restocking costs are withheld.

Because of the language of this regulation and its application by the CDTFA, a dealer could not obtain a sales tax refund if as part of unwinding a deal, the dealer deducts from the refunded sales price a charge for the customer’s use of the motor vehicle. It is noteworthy that a sales tax refund could probably still be obtained if DMV license and registration fees were not refunded to a customer as part of an unwind, since it is apparently the CDTFA’s position that such fees are not part of the “sales price.”

Dealers should be aware that pursuant to California Vehicle Code section 11713(g) they are prohibited from including “as an added cost to the selling price of a vehicle, an amount for licensing or transferring of title of the vehicle, which is not due to the state unless, prior to the sale, that amount has been paid by a dealer to the state in order to avoid penalties that would have accrued because of the late payment of the fees.” This statute does recognize, however, that a dealer can collect a prorated registration fee from a second purchaser of a vehicle where the vehicle had been previously sold by the dealer, that transaction was rescinded, and all license and registration fees were returned to the first purchaser of the vehicle.

Contract Cancellation Option Agreements

When a dealership sells a contract cancellation option on a used vehicle, the price of the option and potential subsequent restocking fee are exempt from sales tax. The amount refunded to the customer pursuant to the exercise of the contract cancellation option agreement is also exempt from sales tax.

Lemon Law and Sales Tax Refunds

When a vehicle has been returned in accordance with California’s Lemon Law and the consumer seeks restitution instead of replacement of the vehicle, the manufacturer may file a claim for a refund of the sales tax with the Department of Tax and Fee Administration. The claim for a refund must include a statement that the claim is submitted in accordance with the provisions of Civil Code section 1793.25 (California’s Lemon Law) as well as documents evidencing that restitution was made pursuant to, and in complete compliance with, subdivision (d)(2) of California Civil Code section 1793.2. The claim must include the following materials:

  1. A copy of the original sales agreement between the buyer and the dealer of the non-conforming motor vehicle;
  2. Copies of documents showing all deductions made in calculating the amount of restitution paid to the buyer along with full explanations for those deductions, including settlement documents and odometer statements;
  3. A copy of the title branded “Lemon Law Buyback” for the non-conforming motor vehicle returned by the buyer;
  4. Proof that the decal the manufacturer is required to affix to that motor vehicle has been so affixed in accordance with section 11713.12 of the Vehicle Code;
  5. The seller’s permit number of the dealer who made the retail sale of the non-conforming motor vehicle to the buyer; and
  6. Evidence that the dealer had reported and paid sales tax on the gross receipts from that sale.

If the consumer instead elects to have the vehicle replaced under the Lemon Law with a new vehicle substantially identical to the non-conforming vehicle, the transaction is treated as fulfilled under the terms of the mandatory warranty. Sales and Use Tax Regulation 1655 provide that no additional tax is due unless the consumer is required to pay additional amounts for the replacement vehicle, in which case tax would be due on the additional amount. If the manufacturer is required to pay an additional amount to the consumer in addition to replacement of the vehicle, this amount can be considered restitution, and a sales tax refund may be owed if the requirements outlined above are fulfilled. Note: The factory may not file a claim for refund if the consumer is allowed a credit toward the purchase of a new vehicle rather than restitution or a replacement vehicle under the Lemon Law.

While the restitution and replacement options seem to solely involve the manufacturer, the June 2001 BOE  Tax Information Bulletin provides that “A manufacturer may allow an authorized dealer to act as its agent for purposes of determining the amount of restitution that is due or to provide a replacement vehicle.”   

Refunds for Charged Off Accounts and Losses

If a dealer charges off an account that has a remaining balance that is deemed unrecoverable and charged off for income tax purposes (or pursuant to generally accepted accounting principles if not required to file income tax returns), and the dealer remitted sales tax on the charged-off account, the dealer is entitled to make an application to the Department of Tax and Fee Administration for a pro-rata deduction or refund of the sales tax remitted.

Finance companies may also apply for a pro-rata deduction or sales tax refund on assigned accounts that meet the same criteria. However, in order to be eligible for a sales tax deduction or refund, the finance company must first obtain an irrevocable agreement from the dealer stating that the finance company is the only entity entitled to claim the deduction or refund. Although most dealers assigned conditional sale contracts and lease contracts to finance companies without recourse, a dealer should carefully review any agreements that a finance company requests to be signed to ensure that the agreement does not conflict with any of the warranty provisions in its master retail agreement which may require the dealer to repurchase a contract due to a breach of one or more of the warranties.

Gasoline

Dealerships generally purchase gasoline to either operate dealership vehicles or to fill the tanks of vehicles they sell. Gasoline purchased to operate dealership vehicles is subject to sales and use taxes. However, gasoline contained in the tanks of sold vehicles is not subject to sales tax, since it is considered to be sold as part of the vehicle.

If a dealer did not pay sales tax when purchasing the gasoline from a distributor, the dealer should pay use tax (the equivalent of sales tax in this example) on a portion of the gasoline purchased. The use tax would be based on the purchase price of the portion of the gasoline used by dealership vehicles and should be declared on the dealership’s quarterly sales tax return.

If a dealer paid sales tax when purchasing the gasoline, the dealer is entitled to a refund or credit for sales tax paid which is attributed to the portion of the gasoline contained in tanks of sold vehicles.

Pursuant to Sales and Use Tax Regulation 1701, a dealer should take a deduction for such sales tax paid on the sales tax return for the period when the sales of the vehicles involved occurred. If the deduction is not taken in the proper quarter, a refund claim should be filed.

Dealership Vehicles

Vehicles used as service vehicles, parts and service department vehicles, tow trucks, etc. are subject to use tax based on the purchase price of the vehicle if they were purchased without tax. If tax was paid when these vehicles were purchased, no additional tax is due. If the vehicle is used as a demonstrator and held for sale at the same time as it is being used for the above-mentioned purposes, a tricky situation arises whereby the dealer must pay a use tax according to the fair rental value of the vehicle for the time it is being used for business or personal purposes. This circumstance is discussed in further detail below in reference to Demonstrator Vehicles.

Loaned Vehicles

Treatment of Dealers

If a dealer purchases a vehicle to be used exclusively as a loaner for service department customers, the vehicle is considered a company vehicle and not to be held for resale or lease. As a result, the dealer cannot use a resale certificate to purchase the vehicle, and tax applies to the sale of the vehicle to the dealer. If the dealer subsequently sells the vehicle, the dealer must report tax on the selling price.

Repairs Under Manufacturer’s Warranty

The tax treatment of vehicles loaned to customers awaiting repairs depends on two factors: (1) whether the repairs are being made pursuant to the manufacturer’s warranty; and (2) whether the vehicle being repaired is leased or owned by the customer.

According to the Board of Equalization’s June 1998 Tax Information Bulletin, the following tax treatment applies to the loan of vehicles without charge to customers while their own vehicle is being repaired. The information provided only applies when the loan of the vehicle is in fulfillment of the contract requirements of a manufacturer’s warranty upon which tax was paid at the time of sale. How the tax applies to the loan of the vehicle depends on whether the customer is the owner or the lessee of the vehicle being repaired.

Vehicle Being Repaired is Owned by Customer:-Tax does not apply to the loaner vehicle, which is regarded as part of the original taxable sale, upon which the proper tax has already been paid.

Vehicle Being Repaired is Leased by Customer:- If the lessee pays tax on rentals payable (a “continuing sale”), the loan is not subject to tax so long as regular rental and tax payments continue to accrue on the lease. The regular lease payments are considered covered by the use of the loaned vehicle.

For certain unusually structured leases, however, the loan of the vehicle may be subject to tax. If the lease is not a continuing sale (tax was paid on the purchase price up front, and is not collected on rentals payable), the dealer is deemed to have made a taxable use of the loaned vehicle. Tax is due on such use, generally measured by rentals payable (if the dealer rents the vehicle from another source) or the fair rental value (if the dealer takes the vehicle from resale inventory).

Loaner Provided While Vehicle is Being Repaired Under Service Contract: Because optional warranties (i.e., service contracts) are not subject to sales tax, loaners provided without charge under optional warranties are subject to tax.

Customer-Paid Repairs or Vehicles Loaned to Customers Awaiting Delivery of Another Vehicle: Loans of vehicle to customers paying for their repairs at a dealership (outside of the manufacturer’s warranty) or awaiting delivery of another vehicle are not considered part of the original purchase and are thus subject to tax. The measure of tax liability in instances where the vehicle loan is subject to tax is discussed in Sales and Use Tax Regulation 1669.5. Accordingly, taxes should be charged based on the fair rental value of the vehicle for the time it is loaned to the customer. The term “fair rental value” is defined as “the amount for which the dealer rents similar vehicles for similar periods to persons who are not customers awaiting delivery of vehicles purchased or leased from the dealer or being repaired by the dealer.”

The regulation also provides that “if the dealer does not rent vehicles under such circumstances, the fair rental value is the amount for which other dealers in the area rent vehicles for similar periods to persons who are not customers awaiting delivery of vehicles purchased or leased from the other dealers or being repaired by the other dealers.”

Demonstrator Vehicles

Under Sales and Use Tax Regulation 1669.5, the measure of use tax owed for demonstrator vehicles depends on three factors: 1) how the vehicle is used, 2) by whom, and 3) for how long. Vehicles used solely for demonstration and display while being held for resale in the regular course of business are exempt from taxation. On the other hand, vehicles that are not frequently demonstrated or displayed for sale but are used for personal or business purposes are subject to use tax based on the full purchase price. The complexity arises in “combined use” situations, where vehicles are used for frequent demonstration or display, but are also used for personal or business purposes. As explained below, use tax based on fair rental value may be paid on vehicles assigned to sales personnel or other employees for a period not exceeding 12 months that are used for combined demonstration and other purposes.

A vehicle assigned to “sales personnel” (salespeople, sales managers, sole proprietors, partners, or corporate officers) who are directly participating in negotiating sales, used for combined demonstration and other use (whether business or personal) for a period not exceeding 12 months, is subject to use tax based on 1/60th of the purchase price for each month of such use.

A vehicle assigned to an employee or officer not classified as “sales personnel” for combined demonstration and other use (whether business or personal) for a period not exceeding 12 months is subject to use tax based on 1/40th of the purchase price for each month of such use.

If the anticipated duration of combined use is unknown at the time the vehicle is assigned, use tax may be paid (based on the appropriate formula for the type of employee using the vehicle) until 12 months have elapsed. At that point, use tax must be paid based upon the vehicle’s cost minus the measure of tax previously reported.

Finally, vehicles assigned to persons other than officers or employees cannot be classified as demonstrators and are subject to use tax based on the full purchase price.

Exemptions

The Sales and Use Tax Law contains specific exemptions for various types of transactions, including sales to the United States Government and sales to foreign diplomats. For information regarding other potential exemptions for which your dealership may be eligible, contact the Department of Tax and Fee Administration.

Sales to the United States Government

Exemption: Pursuant to Sales and Use Tax Regulation 1614, sales tax does not apply to sales to: (a) the United States government or its unincorporated agencies and instrumentalities; (b) any incorporated agency or instrumentality of the United States owned wholly either by the United States or by a corporation wholly owned by the United States; (c) the American National Red Cross, its chapters and branches; or (d) incorporated federal instrumentalities not wholly owned by the United States, unless federal law permits taxing the instrumentality. Examples of the incorporated federal instrumentalities exempt from tax are federal reserve banks, federal credit unions, federal land banks, and federal home loan banks.

Evidence: Dealers should obtain and retain government purchase orders or remittance advises to support such exemptions. (Please note: This exemption applies only to federal government agencies. Sales to state and local agencies are generally taxable.)

Sales to Foreign Diplomats

Exemption: Sales tax does not apply to sales of vehicles to foreign consular officers, employees, and members of their families if those persons have been granted immunity from tax according to treaties or other diplomatic agreements with the United States. 

Evidence: Under the policy of the United States Department of State’s Office of Foreign Missions, authorized sales and use tax exemptions will only be granted if the Office issues a Motor Vehicle Tax-Exemption Letter to the dealership. Crucially, Diplomatic Tax Exemption Cards may not be used in lieu of a Tax Exemption Letter. Accordingly, prior to executing a vehicle sale or lease agreement, the dealership must directly contact the Office of Foreign Missions by e-mail or phone to request the issuance of the Exemption Letter, and provide the following information:

  1. Dealership name, mailing address, and telephone and fax numbers;
  2. Color, year, make, and model of the motor vehicle that the mission or accredited mission member is planning to acquire; and
  3. For official motor vehicles: the name of the foreign mission that is purchasing or leasing the vehicle; or
  4. For personal motor vehicles:
    1. The name (as it appears on the current “A-series” or “G-series” visa) of the accredited mission member or their dependent who is purchasing or leasing the vehicle; and
    2. The individual’s Department-issued Personal Identification Number (PID).
      Note: the dealership must be presented with proof of the individual’s diplomatic or consular status (i.e., valid passport containing a current “A-series” or “G-Series” visa, or Department-issued protocol identification card, or Department-issued driver’s license, or Department-issued Diplomatic Tax Exemption Card.)

The Office of Foreign Missions anticipates that a Motor Vehicle Tax-Exemption Letter should normally be issued within two hours of receiving the request, if requested during normal business hours. Dealers must then follow the instructions contained within the letter, which will allow for the issuance of a federal vehicle registration card and license plates, title to be issued to the lienholder, and authorize the use of the Temporary Operating Copy of the DMV Report of Sale form.  

Out-of-State Sales

Exemption: Sales and Use Tax Regulation 1620 generally holds that vehicles purchased and delivered outside of California for use outside of California are not subject to sales or use tax. However, given the history of abuses of this law by consumers and businesses, many conditions have been placed upon this exemption. Dealers should note that the Department of Tax and Fee Administration views out-of-state sales by California dealers with a suspicious eye.

Current Law. The CDTFA views vehicles sold by California dealers as being subject to sales or use tax, even if sold to a non-resident for use out-of-state, unless several strict requirements are met. In fact, if the purchaser even brings the vehicle into California during the first 12 months after the sale, the vehicle is presumed as having been purchased for use in California and therefore subject to use tax. Vehicles sold for use out-of-state are exempt from California sales and use tax only if all of the following conditions are met:

  1. Title and possession to the vehicle are transferred to a purchaser outside California. The fact that the purchaser accompanied the dealer’s agent to an out-of-state location does not negate the exemption. Dealers should note, however, that tax applies to all merchandise delivered in California, regardless of its ultimate destination.
  2. The vehicle is not sold for use in this state. If the vehicle is brought back into California within the first 12 months after being delivered out-of-state, or if it is used more in-state than out-of-state during the first 12 months after being purchased out-of-state, a rebuttable presumption is established that the vehicle has been purchased for use in this state, and is thus subject to tax.
  3. Evidence: To prove the applicability of this exemption, retaining an abundance of evidence that the sale took place out-of-state is crucial. Dealers should obtain and retain:
    1. Evidence of the customer’s out-of-state address;
    2. Evidence demonstrating that the vehicle was delivered to an out-of-state location, such as:
      1. Documents showing delivery or shipment out-of-state, such as bills of lading or other shipping documents (if delivered by a common carrier auto transporter) or a delivery employee’s expense claims, etc.; and
      2. A statement signed by the delivery person and the purchaser certifying delivery of the vehicle to an out-of-state location. They should have the statement notarized at the out-of-state delivery point with the delivery person and the purchaser both present before the notary. The dealer can use CDTFA Form 448 or a statement that is substantially similar to that found in Form 448.

Repairs of Vehicles Sold for Use Out-of-State. While out-of-state vehicles brought into California within the first 12 months after purchase are generally presumed to have been purchased for use within California, this presumption may be rebutted if the owner provides documentary evidence demonstrating that the vehicle was brought into California exclusively for the limited purpose of warranty or repair service and was used or stored in this state for that purpose for 30 days or less. The presumption that the vehicle was bought for use in California (and therefore subject to use tax) can be rebutted: by documentation, which must include 1) a work order that includes the dates that the vehicle is in the possession of the warranty or repair facility, and 2) a statement by the owner of the vehicle specifying dates of travel to and from the warranty or repair facility. The 30-day clock begins when the vehicle enters California, includes any time of travel to and from the warranty or repair facility, and ends when the vehicle is returned to a point outside California.

Foreign Delivery Programs. Occasionally, import dealers make special arrangements to enable a customer traveling abroad to take delivery of the vehicle directly from the manufacturer in the foreign country. The customer temporarily uses the vehicle abroad and then has it shipped back to a California dealership. If the vehicle was used outside California for more than 365 days, the question sometimes arises as to whether the dealer is required to collect sales tax. Because the vehicle is intended to be used in California, the dealer should collect the tax.

Policy Changes May Be Coming. To increase state budget funds, the legislature frequently changes the policy to expand the number of would-be out-of–state vehicle sales subject to use tax. The legislature may continue to do so in the future. CNCDA will inform dealers of such changes through Bulletin articles and our annual Legislative Summary.

Purchases by California Residents for Use Out-of-State

The Department of Tax and Fee Administration views vehicle purchases by California residents from California dealers for use out-of-state as particularly suspicious, and presumes that such vehicles are intended for use within the state unless even more documentation is obtained. If a buyer claims the vehicle is being purchased for use outside California and the dealer knows the customer is a resident of this state (e.g. has a California driver’s license or a California address, regardless of whether he or she lives in the state only seasonally or periodically), the dealer must obtain a signed statement certifying that the vehicle is being purchased for use outside California. The dealer can use Form 447, which can be ordered from the CDTFA, or a statement that is substantially similar to that found in Form 447. This form requires a statement by the buyer that the vehicle will be used outside California and allows the dealer to overcome this presumption if accepted at the time of sale and taken in good faith. The CDTFA requires the dealer to retain the original forms.

If the dealer does not obtain a signed statement from the customer, the vehicle is considered to be purchased for use in this state, and the dealer must collect tax on the sale.

Although the dealer is not required to pay or collect tax on a vehicle purchased and delivered for use outside California (as described above), the buyer may be required to pay use tax. In general, a customer who purchases a vehicle for delivery outside California is liable for use tax if, following the purchase, he or she:

  • First uses the vehicle outside of California but brings it into the state within 12 months of the date of purchase;
  • First functionally uses the vehicle in California; or
  • Otherwise causes the vehicle to become subject to California vehicle registration requirements.

If Out-of-State Delivery is Made by a Method Other Than a Common Carrier Auto Transporter

Form 448 (Statement of Delivery Outside California) was designed for proper documentation when delivery is made by a method other than a common carrier auto transporter (if an auto transporter makes delivery, a bill of lading or other shipping document can be used). Although its use is not mandatory, Form 448 helps to ensure proper documentation of an exemption. Form 448 is available from the CDTFA website.

Vehicles Sold to Native Americans and Delivered on a Reservation

Exemption: California sales and use tax does not apply to the sale of a vehicle to a Native American where delivery is made and ownership transfers on the reservation.

Dealers that do not remit sales tax on such transactions, however, are often the target of Department of Tax and Fee Administration auditors, particularly when the transactions involve luxury and/or exotic vehicles.

Evidence: Dealers who sell a vehicle to a Native American and deliver the vehicle to a reservation to avoid the application of sales tax must be careful to collect and maintain evidence sufficient to prove that the vehicle purchaser is Native American, that the parties agree that delivery will take place on the reservation, and that delivery does, in fact, take place on the reservation. As such, dealers selling to Native Americans should seek all of the following:

Proof of Native American Status. Dealers must establish that the purchaser of the vehicle is Native American and lives on their reservation. This can be done by requiring both:

  • Identification from the tribe showing that the purchaser is a tribal member; and
  • Proof of residency on the reservation.

Delivery Instructions. In order to ensure that the transaction is exempt from sales tax, the parties should insert a provision in the contract specifying that delivery is to take place on the reservation.

Because standard sale and lease contracts do not include a place to provide delivery instructions, such instructions must be incorporated by reference and integrated into the contract. This may be done using all of the following steps:

  • On the first page of the original and all copies of the contract, insert a conspicuous statement integrating the delivery instructions, such as “Delivery Instructions are attached to and made a part of this agreement”.
  • Staple the original delivery instructions to the contract, and a copy of the instructions to each copy of the contract.
  • On the first page of the delivery instructions, include a statement confirming that the instructions are part of the contract terms, such as “This document is attached to and made a part of [identify the specific contract, including the purchaser’s name and transaction date]”.
NOTE

Regarding assignment of Contracts: Beware that some financial institutions may not purchase contracts that have additional documents attached. Be sure to check with your finance source before using this method.

Delivery on the Reservation. Most importantly, the dealer must physically deliver the vehicle on the reservation. Proving that delivery took place on the reservation is key to defending against a claim by auditors that sales tax is due on the transaction. The CDTFA recommends using as many pieces of evidence as possible to prove that the delivery actually took place on the reservation, including the following:

  • Mileage logs;
  • Expense reports;
  • Time and hour sheets;
  • Photographic evidence;
  • Delivery receipts signed by the purchaser or lessee referring to the specific contract; and
  • Form CDTFA-146-RES.The CDTFA has a form to assist in providing evidence that delivery took place on the reservation. This formincludes sections for the buyer, seller, and a public notary to sign upon vehicle delivery to establish evidence of the location of transfer.

Enforcement. If the regulatory conditions are met, the vehicle purchase should be exempt from sales tax. Some dealers have fulfilled the general requirements for an exemption but have not sufficiently documented the transaction and thus could not prove to the satisfaction of the CDTFA auditors that these requirements have been fulfilled. In such cases, the CDTFA has sought the amount of tax, plus penalties, from the selling dealer. To prevent such a result, make sure to instruct dealership personnel to collect as much information as possible to prove that the requirements described above are satisfied for such transactions. Remember, CDTFA auditors are often looking to collect revenue from your dealership—you have the burden of rebutting their predisposition to believe that the requirements have not been fulfilled. The more evidence you can produce to establish that your transaction was legitimate, the better your chance of rebuttal.

Keep in mind that several of the concerns connected with Out-of-State Vehicle Sales also apply to sales to Native Americans.

Vehicles Loaned to State University Employees

Exemption: Revenue and Taxation Code section 6202.7 specifies that a dealer who loans any motor vehicle to any employee of the University of California or the California State University shall only be liable for the use tax on the loan of that vehicle equal to the amount of tax that would have applied if the vehicle had been leased at fair rental value for that period. To qualify for this favorable use tax treatment (which prevents dealers from being assessed use tax based on the vehicle’s acquisition cost), the loan must satisfy each of the following conditions: (1) the vehicle is loaned for the employee’s exclusive use; (2) the loan is approved by the school chancellor or president; and (3) it is demonstrated that the loan is not dependent upon the retailer receiving any automotive-related business from the university.

Evidence: The dealer should obtain and retain documentation establishing that the loan of the vehicle met the conditions described above.

Vehicles Used in Interstate or Foreign Commerce

Exemption: Sales and Use Tax Regulation 1620 exempts from the use tax any vehicles used in interstate or foreign commerce prior to their entry into this state, and thereafter used continuously in interstate or foreign commerce both within and outside California and not exclusively in California.

Vehicles for Physically Disabled Persons

Exemption: Sales and Use Tax Regulation 1591.3 exempts from the sales and use tax items and materials used to modify a vehicle for physically disabled persons when such items are necessary to enable the vehicle to be used to transport a physically disabled person or persons. Tax does not apply whether the property is installed by the retailer or is sold for installation by other persons. However, sales or purchases of tools and supplies used for modifying the vehicles and which are not incorporated into, attached to, or installed on the vehicle are subject to tax.

Tax does not apply to the gross receipts attributable to the portion of a vehicle that has been modified to enable the vehicle to transport a physically disabled person or persons when the modified vehicle is sold to a physically disabled person.

Tax does not apply to the sale or use of items and materials used to repair the modified portion (the portion that contains equipment previously used to modify the vehicle) of a vehicle used to transport a physically disabled person or persons. Once installed, such “repair parts” qualify as items and materials used to modify a vehicle in order for the vehicle to be used to transport a physically disabled person or persons.

Evidence: The dealer should obtain and retain repair orders and other documentation establishing modification and repair costs to enable the vehicle to transport a physically disabled person.

Lease Taxation

The tax treatment of a leased vehicle depends on whether it is classified as “mobile transportation equipment” (generally trucks, buses, hearses, bogies, dollies, etc.) or as a passenger vehicle. Regardless of how the vehicle is classified, leased vehicles must be registered in the lessor’s name only, or to the lessor/lessee jointly. If a vehicle is registered to a lessee only, the transaction will be taxed as a sale. License fees separately stated in a monthly charge to the lessee are not subject to tax, nor are late charges (if reasonable in amount). Interest charges and deficiency charges are subject to tax.

Passenger Vehicles

The general rule is that leases of vehicles (other than mobile transportation equipment) are subject to tax based on the rental payments. However, dealers are not required to report and pay tax on the vehicle lease if the vehicle is leased in substantially the same form as acquired and sales tax reimbursement was paid to the vendor when the vehicle was purchased; or when the dealer reported and paid California use tax on the purchase price of the vehicle on a timely basis (by the due date of the return for the reporting period in which the vehicle was first leased).

The vast majority of lessors choose to report use tax based on rental proceeds because it substantially lowers the initial tax burden and spreads the remaining use tax payments over the life of the lease.

CNCDA requested that the former Board of Equalization provide clarification regarding a dealer’s responsibility to collect and remit sales and use tax on certain amounts paid by a lessee at lease inception. In a letter to the Association dated May 29, 1998, the BOE issued its response, which states in relevant part:

In virtually all retail motor vehicle lease transactions conducted by your dealer members, the dealer is initially the owner of the leased vehicle and appears on the lease contract as the lessor. At the lease inception, the dealer generally collects from the lessee various ‘up front’ or ‘drive away’ charges. You have asked how tax applies to those charges, and the statutory basis for our answer… In short, basically all [lease inception] charges are taxable, with the exception of those excluded from the tax by [Revenue and Taxation Code] section 6011, such as title and registration fees.

Security Deposit. …..tax does not apply to a refundable security fee when the fee is collected. This is a deposit. Tax does apply to the fee, if it is applied against an obligation of the lessee, when it is so applied.

Capitalized Cost Reductions. Tax applies to capitalized cost reductions. This is an additional charge to use and possess the property.

Document Fees. Tax applies to dealer document preparation charges. Such charges are for services [that are] a part of the sale, and capture for the lessor a cost of its doing business…

Bank Fees. Tax likewise applies to any amount designated as a ‘bank fee,’ ‘acquisition fee,’ or ‘booking fee.’ This is a charge for the service [that is] a part of the sale and represents a reimbursement of an expense…

Excessive Wear and Tear. Please note that tax would also apply to ‘excessive wear and use charges,’ which may be collected at the end of the lease term.

Dealer Is Responsible for Collecting and Remitting Tax. You have an additional question with respect to who is responsible for collecting and remitting taxes on the lease at its inception, when the ‘drive away’ charges are collected from the customer. You point out that it is the business practice of some financial institutions to insist that the tax on a capitalized cost reduction and use tax on the first month’s lease payment be remitted by the financial institution as assignee of the lease, even though the assignee was not the original lessor and did not collect the taxable receipts from the lessee at lease inception…[A]lmost all leases are executed in the name of the dealer. This means that it is the dealer’s responsibility to collect and remit the tax at the time the transaction is entered into. Thus, even though the lease contract may be assigned to the financial institution shortly after its inception and within the quarterly tax reporting period within which the lease is executed, it is the dealer that is obligated to collect and remit the tax on the first month’s rental charge, including those ‘drive away’ charges regarded as taxable, as outlined above…Only if the original contract is executed by the financial institution would the financial institution be responsible for collecting and remitting the tax on the drive away charges.

Resales by Lessees

If a lessee transfers title and registration to a third party within 10 days of the date the lessee acquired title from the lessor at the expiration or termination of a lease, there arises a presumption that a transfer of the vehicle from the lessor to the lessee was a sale for resale. The presumption may be rebutted by evidence that the sale was not for resale prior to use.

Local Use Taxes on Leases

Revenue & Taxation Code section 7205.1 provides the basis for the way use taxes on leases are allocated to cities. If the lessor is a California new motor vehicle dealer or a leasing company, the place of use of the leased vehicle is deemed to be the city in which the lessor’s place of business is located. If a lessor is not a new motor vehicle dealer or a leasing company, and the lessor purchased the vehicle from a new motor vehicle dealer or a leasing company, the place of use of the leased vehicle is deemed to be the city in which the place of business of the person from whom the lessor acquires the vehicle is located. If the lessor does not fall into the categories described above, the use tax is reported and distributed through the countywide pool of the county in which the lessee resides.

Service and Repair

Sales tax principally applies to the retail sale (including exchange or barter) of personal property, while use tax principally applies to the use of such property upon which sales tax was not imposed (for example, leased property). Generally, charges for labor or services are not subject to either sales or use tax if separately stated on a customer invoice. However, labor that is used to make a part is usually taxable, and installation labor may be taxable if a dealer makes an installation on a new vehicle.

For more detailed information regarding taxation of shop supplies, please consult CDTFA Publication 25: “Auto Repair Garages and Service Stations”.

Taxable Sales of Goods

According to the Department of Tax and Fee Administration, the sale or use of the following is generally subject to tax:

  • New, used, or rebuilt automobile parts. This includes both general repair or maintenance parts such as spark plugs, points and condensers, belts, tires, batteries, PCV valves, or brake shoes or pads; and replacement parts such as engines, transmissions, alternators, water pumps, fenders, or bumpers.
  • Parts which a dealer manufactures. Included in the taxable selling price of the part is the labor for its manufacture.
  • Lubricating products such as oils and greases.
  • Fluids such as brake or transmission fluid.
  • Fuel (see “Gasoline” section, above).

Non-Taxable Services

According to the Department of Tax and Fee Administration, charges for the following services or labor are generally not subject to tax:

  • Installation labor on used vehicles such as putting in spark plugs, replacing brake shoes or pads, removing and installing engines, or installing sound systems.
  • Repair labor to bring a vehicle back to its original condition, including rebuilding carburetors or heads, replacing parts in engines or transmissions, and performing body and fender work (including the painting of new repair parts).
  • Maintenance services such as tune-ups, oil changes, or radiator flushes.
  • Services such as towing or battery charging.

Hazardous Waste Fees

Hazardous waste fees are not subject to sales tax if directly related to a nontaxable repair or service, such as providing an oil change. Tax applies to hazardous waste fees charged in connection with the taxable sale of parts, such as when charging a fee to cover disposal of contaminated soil in connection with the sale of a used engine.

Core Charges for Vehicle Repair Parts

The following appeared in the Board of Equalization’s June 2001 Tax Information Bulletin:

Putting the “parts” together in figuring out taxes can be just as challenging as putting the parts together on a vehicle. The parts must fit right to get the right results.

For example, a common problem area is how to apply tax when there is a “core” charge.

Core charges are trade-in allowances included in the selling price of a part. They are designed to encourage the return of old parts that can be remanufactured. Auto parts sellers often include a core charge when they sell parts such as batteries, water pumps, brake shoes, and alternators.

Example

A seller sells a battery for $54, which includes a $7 core charge. If the buyer trades in his or her old battery, the seller will give the buyer a $7 credit toward the purchase.

How tax applies How you calculate the taxable selling price of the part will depend on whether you are selling a new or used part, or a reconditioned or rebuilt part.

New or used parts You are liable for tax on the selling price of the new or used part, including the core charge. Tax applies to the core charge because the allowance for the trade-in is considered part of your “payment” for the sale.

Example:

Selling price of new battery $54.00 (including $7 core charge)
Tax ($54 x 7%) $3.78
Trade-in allowance -$7.00
Total $50.78

Some sellers separately invoice the trade-in allowance for an old battery as a “core charge.” Even though the trade-in is separately invoiced, tax must still be calculated on the selling price before the trade-in.

Reconditioned or rebuilt parts On sales of reconditioned or rebuilt parts, tax applies to the “exchange price.” The exchange price is the total selling price of the part, including any core charge, less any credit you give the customer for turning in a worn part.

You should not tax the core charge credit whether you give it to the customer at the time of the sale or at some later point. If you refund a core charge to your customer after the original sale, you must also be sure to refund any tax you collected on the charge. Any tax you do not refund must be paid to the Board.

Example:

Rebuilt Alternator  $120.00 (Including $9 core charge)
Core Charge Credit -$9.00
Taxable selling price $111.00
Tax ($111.00 x 7%) $7.77
Total $118.77

Tax does not apply to the core charge because you are selling a reconditioned or rebuilt part.

Discounts

A discount given to a customer is not taxable, provided the dealer is not reimbursed for it by a manufacturer or distributor. For example, if a dealer sells an engine (whether new or rebuilt) for $5,000 less a 10 percent discount of $500, the taxable selling price is $4,500 ($5,000-$500).

However, if a dealer sells an engine for $5,000 less a $500 manufacturer’s rebate, the taxable selling price is $5,000. Tax applies to the total gross receipts from the sale, even though the dealer receives partial payment from the customer ($4,500) and the balance from the manufacturer ($500). In other words, tax applies to the selling price of the engine before the dealer deducts the rebate amount.

Invoices

To avoid possible errors in computing tax on sales, dealers should clearly identify on their invoices those amounts being allowed for trade-ins, core charges, and discounts. Dealers should also be careful to calculate tax on the full selling price of a new or used part before subtracting out any trade-in allowance. Invoices and other documents related to the sale should be kept with other business records.

Sublet Repairs

Resale certificates should be given to subrepairers when sending out work to be performed on behalf of the dealer. The dealer should request the subrepairer to separately itemize parts and labor on the invoice. The dealer should, of course, also segregate parts and labor on the customer’s invoice. The dealer should charge their customers tax on any parts furnished by the subrepairer, including dealer reserve.

Exchanged Parts

If allowing a discount for tires, batteries, and other merchandise traded in, a dealer must charge sales tax on the full price of the item (without any deduction for the trade-in). If a sale involves both a discount and a trade-in, each amount should be separately itemized.

Supplies Used for Repairs

The Department of Tax and Fee Administration takes the position that supplies such as sandpaper, paint thinner, abrasives, and masking tape which are used by a repair dealer in making repairs and which do not attach to the vehicle being repaired are consumed by the dealer. This means that sales tax is due when those supplies are purchased by the dealer from a supplier. Automotive repair shops are prohibited from making a nonspecific or general charge to cover supply costs. Such costs must be separately itemized to identify the supply item charged to the customer. If the dealer did not pay tax or tax reimbursement when the items were purchased, they should report the cost of the purchase on their sales and use tax return under “Purchases Subject to Use Tax”.

Warranty and Service Contract Repairs

The following appeared in the Board of Equalization’s June 2001 Tax Information Bulletin:

Regulation 1655, Returns, Defects and Replacements, was recently revised to clarify how tax applies to warranties that include a customer deductible. Although the regulation applies to warranties in general, deductibles are common with both mandatory and optional vehicle warranty contracts. The following information explains the application of tax to typical vehicle warranty contracts.

Mandatory Warranties. A warranty is mandatory if the buyer, as a condition of sale, is required to purchase the warranty from the seller. In general, a manufacturer’s warranty is a warranty provided by the vehicle manufacturer and is included in the selling price of the vehicle when sold by the dealer. A manufacturer’s warranty is considered a mandatory warranty.

Taxability when there is no deductible under a mandatory warranty. Tax does not apply to charges for parts used for the repair. Although the repairer will charge the manufacturer for the parts used in the repair, those parts are considered a sale for resale and are not subject to tax under a mandatory warranty. They are considered sold to the customer as part of the original sale of the vehicle.

Taxability when there is a deductible under a mandatory warranty. If the customer pays a deductible, tax does apply. The tax amount is measured by the amount of the deductible allocable to the sale of the parts to the customer.

Unless otherwise stated in the warranty contract, when the warranty provides that the customer will pay a deductible towards repairs and services provided under the warranty, the person providing the warranty contract is liable for any tax or tax reimbursement otherwise payable by the customer with respect to that deductible.

Example 1 A customer is required to pay a $50 deductible under a manufacturer’s mandatory warranty. The repairer bills $200 for the repair work (not including tax): $75 for parts and $125 for labor. The portion of the deductible subject to tax would be: $75 ÷ $200 = 37.50% x $50 deductible = $18.75. Tax due on the deductible payment equals $1.31 ($18.75 x 7% tax rate).

The total charge for the job would be $201.31. The repairer would charge $50 (deductible) to the customer and the balance, $151.31, to the manufacturer ($200 parts/labor + $1.31 sales tax – $50 deductible).

Note: In this example, we have assumed there is no provision in the warranty contract stating that the customer is responsible for sales tax on the portion of the deductible related to the sale of tangible personal property (parts).

Optional Warranties. A warranty is optional when the buyer is not required to purchase the warranty from the seller, but may optionally purchase the warranty from the seller or someone of his/her own choosing. Optional vehicle warranties can be offered by both the manufacturer and the dealer.

Optional warranties offered by the dealer. If the customer is not obligated to pay a deductible, the dealer (repairer) is considered the end user of the repair parts and owes tax on his or her cost for the parts. (In other words, the repairer is not a seller of the parts and tax does not apply to the transfer of the parts to the customer.)

If the customer is obligated to pay a deductible, the repairer is considered the end user of a portion of the parts and a seller of the remainder (see Example 1 for an example of how to prorate a portion of the deductible as a seller.)

Unless otherwise stated in the warranty contract, when the warranty provides that the customer will pay a deductible towards repairs and services provided under the warranty, the person providing the warranty contract is liable for any tax or tax reimbursement otherwise payable by the customer with respect to that deductible.

Optional warranties offered by the manufacturer. The manufacturer is considered the consumer of the repair parts for tax purposes. As a result, tax applies to the retail sale of parts to the manufacturer by the dealer (repairer). The repairer performing the repairs under the optional warranty is considered the retailer of the parts to the manufacturer and is responsible for reporting sales tax on the retail selling price of the parts (cost plus the markup).

Example 2 A customer is required to pay a $50 deductible under a manufacturer’s optional warranty. The repairer bills $200 for the repair work (not including tax): $75 for parts and $125 for labor. Under an optional warranty, sales tax would apply to the full charge for parts ($75 x 7% tax rate = $5.25 tax).

The total charges for the job would be $205.25 ($200 parts/labor + $5.25 tax). The repairer would charge $50 (deductible) to the customer and $155.25 to the manufacturer ($200 parts/labor + $5.25 sales tax – $50 deductible).

Note: In this example, we have assumed there is no provision in the warranty contract stating that the customer is responsible for sales tax on the portion of the deductible related to the sale of tangible personal property (parts). If the warranty contract does provide that the customer is liable for tax or tax reimbursement on the portion of the deductible related to parts, the repairer must prorate any charges for sales tax reimbursement between the customer and the manufacturer.

Responsible Persons for Sales and Use Tax Liability

Sales and Use Tax Regulation 1702.5 makes a responsible person who willfully fails to pay sales and use taxes under certain circumstances personally liable for payment. Personal liability only applies if the Department of Tax and Fee Administration establishes that while the individual was a “responsible person” for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company, the taxpaying entity: (1) sold tangible personal property in the conduct of its business and collected sales tax reimbursement on the selling price and failed to remit such tax when due; (2) consumed tangible personal property and failed to pay the applicable tax to the seller or the board; or (3) issued a receipt for use tax and failed to report and pay the tax.

The Regulation defines a responsible person as “any officer, member, manager, employee, director, shareholder, partner, or other person having control or supervision of, or who is charged with the responsibility for, the filing of returns or the payment of tax or who has a duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company in complying with any provision of the Sales and Use Tax Law. The fact that a person possesses any of the aforementioned titles, in and of itself, is not sufficient to establish that the person is a “responsible person”. The term ‘responsible person’ does not include any person who would otherwise qualify but is serving in the capacity as an unpaid volunteer for a non-profit organization.” The regulation contains a rebuttable presumption that if the person is not an officer, member, partner, or manager with an ownership interest in the entity, the person is presumed not to be personally liable.

The word “willful” in the Regulation means voluntary, conscious, and intentional. A failure to pay or cause to be paid may be willful even though such failure was not done with a bad purpose or motive. A person has willfully failed to pay the taxes, or cause them to be paid, only when the CDTFA establishes all of the following:

  1. On or after the date that the taxes came due, the responsible person had actual knowledge that the taxes were due, but not being paid.
  2. The responsible person had the authority to pay the taxes or cause them to be paid (i) on the date that the taxes came due and (ii) when the responsible person had actual knowledge as defined in (A). A responsible person who was required to obtain approval from another person prior to paying the taxes at issue and was unable to act on his or her own in making the decision to pay the taxes does not have the authority to pay the taxes or cause them to be paid.
  3. When the responsible person had actual knowledge as defined in (A), the responsible person had the ability to pay the taxes but chose not to do so.

These rules apply to unpaid taxes and interest and penalties which were not paid upon termination, dissolution, or abandonment of the business of the corporation, partnership, limited partnership, limited liability partnership, or limited liability company. The word “termination” includes discontinuance or cessation of all business activities for which the corporation, partnership, limited partnership, limited liability partnership, or limited liability company was required to hold a seller’s permit or certificate of registration for the collection of use tax. When businesses are failing, dealers may be tempted to refuse to pay sales or use tax in an effort to keep the business alive. Sales and use taxes are not the type of debt that should go unpaid, however, since “responsible persons” can be held personally liable for the payment of such taxes.

Paying Sales Taxes to States Other Than California

In June 2018, the United States Supreme Court ruled in South Dakota v. Wayfair that states can require businesses without a physical presence in the state to collect and remit sales taxes on transactions within the state. Since this decision, jurisdictions throughout the United States have adopted new laws to impose taxes on out-of-state retailers. Such retailers typically engage in commerce on the internet.

AB 147 (2019) was California’s implementation of tax requirements on out-of-state retailers. AB 147 requires out-of-state businesses having combined annual sales to California persons that exceed $500,000 to follow new rules and register with the CDTFA.

While AB 147 does not directly impact dealers with operations solely within California, California dealers selling vehicles and other items to out-of-state persons should take note that recently adopted legislation in other states may trigger similar registration and reporting requirements. Out-of-state dealers selling vehicles to California customers should carefully review AB 147’s registration and reporting requirements with applicable vendors and/or counsel.

DMV Investigations and Accusations

Overview

The right of a person to obtain and retain an automobile dealer’s license is constitu­tionally protected and cannot be impaired without providing the applicant or dealer with procedural due process.

Before a person can be finally denied a dealer’s li­cense, or before such a license once issued may be suspended, revoked, conditioned or otherwise lim­ited, the party affected must be provided an adminis­trative hearing. In the case of an action against a dealer, the process is initiated by the filing of an accu­sation by the Department of Motor Vehicles (hereinafter “DMV”) against the dealer. Because some form of a DMV investigation necessarily precedes the filing of an accusation, a discussion of the two topics goes hand in hand.

The Vehicle Code and Government Code set forth the rights of the DMV to investigate a dealer’s busi­ness activities and to inspect a dealer’s records. The Vehicle Code further sets forth the grounds upon which the DMV may impose license discipline upon a dealer and the grounds for refusing to issue a li­cense to a dealer, and provides that such action may be taken only after notice and hearing. The notice and hearing requirements authorizing the filing by the DMV of accusations against dealers, and state­ments of issues when new car dealer applicants are de­nied a license, and the procedures to be followed, are set forth in the Administrative Procedure Act and the provisions for Administrative Adjudication found in Government Code sections 11500 through 11528. These are designed to provide a dealer or applicant procedural due process in conformity with both state and federal constitutional requirements.

Although the incidents of accusations being filed against new car dealers are fortunately quite small, perhaps as little as one or three percent of new car dealers annually are served with an accusation, it is ­extremely important that every dealer be familiar with what triggers an accusation and what dealers must and should do in the event their dealership becomes a target of a DMV investigation and is served with an accusation.

It will be the purpose of this chapter to review the following topics: the extent of the DMV’s authority to conduct investigations and to inspect records; DMV investigative procedures leading up to the po­tential filing of an accusation; grounds for license revocation or suspension; matters typically investi­gated by the DMV; how a dealer should conduct himself or herself if the dealership is undergoing a DMV re­view; the pre-hearing, hearing and post-hearing pro­cedures governing accusations; appeals to the New Motor Vehicle Board; judicial review of a final Board decision; and the effect license discipline has upon a dealer and the dealership’s officers and managerial employees. Grounds upon which the DMV may deny a license to an applicant for a new car dealer’s license and the applicant’s rights in the event of a denial will likewise be covered.

A discussion of the alternatives to a hearing on an accusation, namely a settlement in lieu of the accu­sation or a settlement of the accusation itself, and practical considerations involving such settlements are at the end this chapter.

DMV Investigations and Inspections

Statutory Authority

The requirement that a dealer ­obtain a license be­fore engaging in the business of operating an auto­mobile dealership has long been recognized as a valid exercise of police power to be exercised for the public good. The exercise of this power over the is­suance of dealer licenses and dealership ­activities and operations is entrusted to the Department of Motor Vehicles of the State of California.

The direc­tor and deputy director of the DMV, the Deputy Director, Investigations, the Chief, Field Investigations Branch, and the investigators of the Department, including rank-and-file supervisory, and management personnel, shall have the pow­ers of peace officers for the purpose of enforcing those provisions of law committed to the administra­tion of the Department.

The head of each state department “…may make investi­gations and prosecute actions concerning”:

  1. All matters relating to the business activities and subjects under the jurisdiction of the De­partment.
  2. Violations of any law or rule or order of the Department.
  3. Such other matters as may be provided by law.

In connection with these investigations the DMV Director the authority to do the following:

  1. Inspect and copy books, records, and other items described in subdivision (e).
  2. Hear complaints.
  3. Administer oaths.
  4. Certify to all official acts.
  5. Issue subpoenas for the attendance of witnesses and the production of papers, books, accounts, documents, any writing as defined by Section 250 of the Evidence Code, tangible things, and testimony pertinent or material to any inquiry, investigation, hearing, proceeding, or action conducted in any part of the state.
  6. Promulgate interrogatories pertinent or material to any inquiry, investigation, hearing, proceeding, or action.
  7. Divulge information or evidence related to the investigation of unlawful activity discovered from interrogatory answers, papers, books, accounts, documents, and any other item described in subdivision (e), or testimony, to the Attorney General or to any prosecuting attorney of this state, any other state, or the United States who has a responsibility for investigating the unlawful activity investigated or discovered, or to any governmental agency responsible for enforcing laws related to the unlawful activity investigated or discovered, if the Attorney General, prosecuting attorney, or agency to which the information or evidence is divulged agrees to maintain the confidentiality of the information received to the extent required by this article.
  8. Present information or evidence obtained or developed from the investigation of unlawful activity to a court or at an administrative hearing in connection with any action or proceeding.

In addition, Vehicle Code section 1670 (which came from former Vehicle Code section 320(b)) pro­vides that a licensee issued an occupational license by the Department and conducting more than one type of business from an established place of busi­ness shall provide a clear physical division between the types of business and concludes with a sentence reading as follows: “The established place of busi­ness shall be open to in­spection of the premises, per­tinent records, and vehicles by any peace officer during business hours.”

The DMV has consistently taken the position that the quoted language from section 1670 gives it the unlimited right to inspect the premises of a dealer­ship and its pertinent records which by regulation it defines as those records of a dealership “…maintained in the regular course of business inso­far as those records are directly concerned with the purchase, sale, rental or lease of a vehicle.”

This position was originally rejected by the Court of Appeal in Addison v. Department of Motor Vehicles which held that the right of inspection was limited to those in­stances only where the licensee conducted more than one type of business on the premises. However, an­other Court of Appeal decision in People v. Shope held that the authorization to inspect found in Vehi­cle Code section 320(b) (now section 1670) applied to all dealerships. In Terry York Imports v. DMV the Court of Appeal held that the Shope in­terpretation of section 320 was not necessary to af­firm the conviction in that case and that its interpre­tation of legislative intent concerning that section was questionable. The Court in the Terry York case then went on to squarely hold that section 320(b) (now section 1670) did not give the DMV investigators the right to conduct a warrantless and unlimited search of the business records of a retail car dealership. It noted that under the facts in the Terry York case, the DMV investigator refused to identify what “pertinent records” it sought. Al­though the door might still be slightly open for the DMV to claim the right to inspect records at a deal­ership without a subpoena where the DMV specifies the exact records it seeks, the language of the Terry York case would appear to bar even such a limited inspection unless the dealership was conducting more than one type of business at the premises.

Finally, the Vehicle Code provides that the DMV shall furnish to dealers books and forms as it determines necessary and also states: “Those books and forms are and shall remain the property of the department and may be taken up at any time for inspection.” The Terry York deci­sion has no applicability to the right of the DMV to pick up the report of sale books at a dealership at any time for inspection.

Routine DMV ­Inspections or ­Inquir­ies

Inspections of dealership re­cords are generally as­sociated with two types of investigations, namely a limited inquiry into a particular consumer complaint or complaints or practice which has come to the at­tention of the Department, or a dealer review where a team of investigators, usually two, makes a com­prehensive review of the entire range of a dealer’s sales practices and procedures, or a comprehensive review of a particular facet of a dealer’s activities, such as for example, advertising.

Because one of the paramount responsibilities of the DMV is consumer protection, it routinely investi­gates customer complaints against dealers. It is the policy of the Department to require that a complaint be put in writing before it will look into it, usually on a Department form, and this form provides a place for the investigator to indicate the action taken, disposition of the complaint and whether a violation of a law or regulation was found on the part of the dealer against whom the complaint was lodged. Re­gardless of whether any violation of law or wrongdo­ing is found to exist, the record of the complaint is placed in the dealer’s file maintained by the Depart­ment, unless the Department determines that the complaint was totally unfounded. These files are not open to the public except by subpoena; however, a dealer may view the file upon request. (See also the discussion What’s in A Dealer File in the chapter in this Management Guide entitled Other Important Topics.)

A review of many complaint reports reflects that, in a majority of instances, the dealer has already resolved the complaint or is in the process of resolving it, and the dealer’s cooperation is duly noted in the report. A great many of the complaints deal with warranty and service-related problems, rather than sales related problems, and in a majority of instances there is a notation that no violation was found to exist. Where a violation of law is found or substantiated, one of the investigator’s duties is to explain the violation and recommend corrective ac­tion.

CAUTION

Regarding Number And Frequency Of Complaints: As will be seen, one of the factors that may lead to a full DMV review and ultimately a potential accusation is the number and frequency of complaints registered against a particular dealer. Lack of awareness on the part of the dealer of such complaints is not a good defense. New Motor Vehicle Board deci­sions, on appeals by dealers who have had discipline imposed upon their li­censes as a result of accusations, are re­plete with statements that a dealer is re­sponsible for knowing what is going on at the dealership. A procedure for speedy and expeditious handling of all consumer complaints by a dealership, and one which insures that the dealer is advised of all complaints and their reso­lution, is an essential precaution which should eliminate any potential problem developing which might lead to a dealer review or ultimately to the filing of an ac­cusation.

Tips for Responding to a DMV Visit

  • Determine the Purpose of the Visit. Although sometimes there may random compliance inspections, government agencies generally will not take the time and expense to pay you a visit unless they’ve received a complaint—either from a customer, employee, union, or competitor. Politely ask whether the visit is a random visit or an investigation, and what sparked their visit. The more information you obtain, the better you’ll be able to cooperate with their requests in a targeted manner, and the better you’ll be able to get to the bottom of the problem.
  • Be Courteous.Government agencies do not respond to rudeness and intimidation by cowering away. If anything, such defensive stances will lead them to believe that their suspicions of wrongdoing have been confirmed. For instance, if the agency is asking for a customer file, responding “get a warrant” will probably lead them to do just that. A better response would be “We’d really like to give this to you, but state and federal laws do not allow us to provide confidential customer information without a warrant or subpoena. We can call our attorney to see if we can find another way to get you the information you need.”
  • Call Your Attorney.If the DMV investigates your dealership, make sure to call competent counsel to get advice—and do so immediately.
  • Know Your Rights.Although agencies generally have the right to inspect public areas for compliance (e.g., checking whether required signs are posted or observing how you handle and label Hazardous Materials), they have limited rights to look further into your customer and business records. Make sure you do not give the agencies information or files to which they are not entitled. For instance, although California law specifically provides DMV with access to your Report-of-Sale books, no such law grants DMV access to deal jackets or other business records without a warrant or subpoena. Your attorney should be able to prevent overly aggressive investigators from accessing inappropriate files.
  • Let CNCDA Know.CNCDA tracks enforcement trends, allowing it to get the word out to other dealers to assist in compliance. The ability to do so, however, is limited to the feedback it receives from CNCDA members. If you find yourself visited by an agency, please give CNCDA a call at (916) 441-2599.

Dealer Reviews

Unlike occasional inquiries relating to customer complaints or relating, for example, to a particular ad run by a dealer, where the investigator may give the dealer or his or her representative a phone call or make an appointment to discuss the matter, a dealer review is a comprehensive and systematic investigation which usually extends to a dealer’s entire sales and reporting practices. A review is initiated by either the DMV field supervisor for your area or DMV headquarters in Sacramento. Although procedures may vary depending upon the particular district or investigators involved, the following is generally typical of what transpires during a review.

What Triggers a Dealer Review

There are a number of “red flags” which may trigger a review. These include an excessive or un­usual number of consumer complaints; unusual ad­vertising claims; questionable or apparently mislead­ing advertising observed during routine monitoring of ads by the DMV or consumer law sections of the Attorney General, City Attorney and District Attor­ney’s Offices; dishonored checks submitted to the Department by the dealer; a claim by a financial institution that a dealer is out of trust; a claim that the dealer has bounced drafts given to another dealer; excessive administrative service fees based upon improper or late reporting of sales to the De­partment; and information from other licensees indi­cating participation in unlawful or improper activi­ties. Although it was formerly standard practice for the Department to conduct some dealer reviews on a random sampling basis without any particular trig­gering event, this policy apparently has been discontinued and reviews today appear only to be initiated for cause.

How the Dealer Review Commences

The review is commenced by advising the dealer that a review has been initiated by the Department and an appointment is made to pick up the dealer’s report of sale books. At this time, the investigators are required to explain to the dealer or an officer of the dealership the review procedure. If the dealer’s advertising triggered the review, the dealer may be asked at the same time or at a later date to furnish copies of all newspaper ads or the scripts of all radio or TV ads for a specified period. Once the report of sale books have been taken by the investigators, there is an apparent lull in the investigation which may last anywhere from a week to a couple of months during which the investigators examine the report of sale books.

Why Your Report of Sale Books are Picked Up

The report of sale books provides much in­formation to the investigators and play a significant role in any review. They help the in­vestigators pinpoint the particular sales jackets which may later be requested. Not only do the report of sale books provide the name and address of each purchaser and the vehicle identification number of each vehicle sold, as well as the date of sale and the date of first operation, they also reflect whether ve­hicles were sold as new or used and whether any re­ported sale was subsequently unwound and the ve­hicle identified therein resold. Names of customers who bought unwinds can be obtained and names of customers who purchased vehicles during the period of any particular advertising or incentive campaign, or who purchased specified advertised vehicles, are thus obtained.

What Follows the Taking of The Report of Sale Books

The Inspection of Selected Sales Jackets

Following the review of the report of sale books, the investigators go back to the dealership and re­quest that certain sales jackets be pulled. Although this may appear to be an at random listing, it is usually a list of files which will more likely reveal, if such is the case, possible violations of law based upon the investigators’ expertise, preliminary review of the report of sale books, dealer advertising, and a review of any prior consumer complaints. In light of the right to refuse such an inspection given by the Terry York case discussed earlier, it would be advisable at this stage of the investigation to consult your attorney as to whether you wish to volunteer the requested records or force the DMV to use its subpoena power.

Selected sales jackets involving rollbacks, for example, might show that the vehicle was described as new on the conditional sale contract covering its re­sale. A review of the sale of advertised ve­hicles or sales of vehicles sold during the applicable period of an advertising campaign, as a further ex­ample, may show that a vehicle was not sold as ad­vertised or that a customer did not get an advertised incentive, or that a vehicle continued to be advertised for sale more than 48 hours after its sale. Also, the reported date of sale and of first operation may not correspond with the date of a customer’s contract or date of delivery. Finally, the sales jackets which are pulled may turn up possible violations of law beyond the scope of the initial reason for pulling the file. The review of a number of files relating to advertis­ing will also provide a random sampling of conditional sale contracts which may possibly reflect Automobile Sales Financing Act or Leasing Act violations. An investigator, for ex­ample, might find that a conditional sale contract is not properly filled out or does not properly document a side loan, and if this is the case, additional files might be requested.

The Interviewing of Customers

Following the examination of the dealer’s records and sales jackets, and depending on what has been re­vealed so far, there may be an­other apparent lull in the investigation. If the dealer has not been told that the investigation has been concluded, it can be as­sumed that during this period investigators are in­terviewing customers to clear up questions raised thus far by the investigation. For example, where an unwind was reported sold on a used report of sale, but the vehicle was described as new on the conditional sale contract, the customer might be asked what he or she was told by the salesperson about the vehicle at the time of sale. In the case of an advertised vehi­cle or incentive, the file might not be clear as to whether the customer got the benefit of the ad and an interview would clear the matter up.

It is not uncommon during this phase of the review for a dealer to get a call from a customer asking the dealer why he or she is being interviewed by the DMV. The dealer should in this event get from the customer as complete an account of the interview as possible and make a written memorandum of the telephone inter­view. It is important to attempt to determine the manner in which the investigator interviewed the customer. For example, did the interviewer ask leading questions, attempt to put words in the mouth of the customer or violate any of the DMV guidelines set forth in the section below entitled “THE CONDUCT OF IN­VESTIGATORS”. If so, this conduct should be im­mediately reported to the supervising investigator.

Also, this information will assist your attorney in cross examining the customer and the investigators and may help show bias on the part of the investiga­tors in the event an accusation results from the in­vestigation. For example, a number of accusations have been filed alleging that a dealer has resold un­winds as new vehicles. In some of these cases it has not been uncommon to find that questions were put to the dealer’s customers by investigators such as: “You thought you were buying a new car, didn’t you?” or “Did you know that you were buying a used car?” or “Did you know that the vehicle you bought was previously registered and operated on the public streets?” A “yes” answer to the first ques­tion and a “no” answer to the latter two questions may lead after further questioning to a report that the dealer has misrepresented a used vehicle as being new. At the hearing, however, it may very well de­velop that the customer knew that the car had a few miles on it because a previous buyer could not get financing, but felt that because of the warranty and the low mileage that it was like buying a new car.

Does the DMV have a right to go out and inter­view my customers?

Of all aspects of a dealer review, the interviewing of a dealer’s customers by DMV investigators is the most annoying and troublesome. No one seriously questions the right of the DMV to listen to and in­vestigate complaints initiated by a customer. But what about the customer who isn’t complaining? “What right does the DMV have to go out and dis­turb one of my customers” is perhaps the most fre­quently asked question by a dealer who is undergo­ing a review. An argument can be made that subsection (b) of Government Code section 11181 which sets forth the powers of a department in connection with investigations merely states, “Hear complaints,” and the section does not specifically say that non-complaining customers may be interviewed. The DMV would argue that the right to interview customers is included within the broad authority given a depart­ment head by Government Code section 11180 quoted earlier.

Furthermore, the power to subpoena witnesses is expressly given and it might be counter-pro­ductive to insist that the Department use its subpoena in order to conduct a customer interview. One ques­tion to be addressed is under what circum­stances may a customer be interviewed and how should the interview be conducted. The DMV in the exercise of its police power cannot unreasonably in­terfere with a dealer’s relationship with the dealer’s custom­ers and any at random interviewing of a dealer’s customers without some legitimate basis for the in­terview would certainly appear to be an abuse of the police power.

When the customer interview does legitimately fall within the scope of the investigation, the investigator is not entitled to solicit a complaint from the cus­tomer or imply to the customer that the dealer has done anything wrong, or promise or infer that some benefit might come to the customer in exchange for the customer’s co­operation against the dealer. Any such actions would be contrary to DMV policy and should result in ­disciplinary action against any ­in­vestigator employing such ­tactics. (See the section below entitled “THE CONDUCT OF INVESTIGATORS”).

How the Review is Concluded

The Dealer Resume

Except in the rare instances where a criminal fil­ing is pending or intended, a resume of the review, sometimes referred to as the exit interview, is held with the dealer or an executive officer of the dealer­ship. This is almost always done by specific ap­pointment for that purpose.

At the resume, the investigators review the results of their findings. Any violations of law found to ex­ist are explained to the dealer or are again reviewed with the dealer and corrective action is recom­mended. (If during a review the investigators dis­cover some violation of a law or regulation which is being committed on an ongoing basis, they are in­structed to immediately advise the dealer. There was a tendency at one time by some investigators to let the violations build up so as to strengthen a case against a dealer, but this tendency was at such odds with the Department’s primary purpose of protecting the public, and that investigators are strictly advised to call ongoing violations to the attention of the dealer at the time of discovery.) During the resume, the in­vestigators may also ask the dealer questions about particular transactions or ask the dealer to explain some aspect of a transaction. As a general rule, it is strongly recommended that a dealer never call into the meeting any of the dealership personnel to answer questions in the presence of the investigators. Answers might be given too quickly and without adequate review of the file and knowledge of the particular issue in­volved and yet these answers may become a part of the investigator’s report and may be used to impeach an employee who gives a different, although more accurate, account of the event at the time of the hearing based on a more careful review of the file. As a ­matter of practice, if the dealer is not able to answer an investigator’s question without resort to other personnel or to a particular file, the dealer should defer an answer and simply state that he or she will have to look into the matter.

A dealer should consult an attorney regarding the advisability of having an attorney present at the re­sume.

In addition to reviewing the results of the investi­gation with the dealer and affording the dealer an opportunity to rebut any asserted violations of law, investigators are instructed to advise the dealer of the recommended course of action to be taken by the Department relative to such violations. Furthermore, if administrative action (the filing of an accusation) is the recommended course of action, the district su­pervisor may accompany the investigator or investi­gators and be present at the exit interview with the dealer.

The Investigator’s Report

Following the resume, the investigators prepare a report of their review and submit it to their supervis­ing investigator for review. The report will detail what the investigators did, who they talked to at the dealership, the number of files reviewed, the adver­tising or other documents reviewed, results of inter­views with customers and the conclusions of the in­vestigators as to whether any violations were found to exist. The number and type of violations and the code sections or regulations violated will be listed and the witnesses and documents which support each violation, together with a summary of the evidence accumulated thus far, will be given. The attitude of the dealer and the degree to which the dealer coop­erated with the investigators is reported as well as the results of the dealer resume. The report contains the recommendation of the investigators which may or may not ­include a recommendation that an acc­usation be filed, and finally, the number of hours spent on the entire investigation is listed.

The investigator’s report is submitted to the su­pervising investigator for review, and the supervising investigator makes the final determination on whether to recommend that the Department “go administrative,” in which case the report together with a recommendation is submitted to the Office of the Chief of Compliance in Sacramento. Where administrative action is deemed appropriate, supporting documents and other evidence are submitted to the Department’s legal staff for review and preparation of an official acc­usation.

The Conduct of Investigators

Whether it be in connection with a customer’s so­licitation for help from the Department in resolving a problem or misunderstanding with a dealer, or in connection with a customer complaint, or in connec­tion with a full dealer review, investigators are strictly prohibited by the Department from coercive and prejudicial conduct. A bulletin prepared by the Division of Compliance on the subject matter of the obligations and procedures of DMV investigators distributed to dealers in July 1977, and redistributed September 30, 1980, is, according to DMV representatives, no longer incorporated in DMV materials. In con­nection with the handling of consumer solicitations for help, the resolving of consumer complaints with dealers, and the interviewing of consumers in the course of an investigation, the bulletin provided the following guidelines to be followed by investigators:

  • Regardless of the fact that consumer complaint follow-ups receive high priority, investigators are prohibited from coaxing or coercing a buyer into making a complaint against a dealer.
  • In the course of resolving the complaint with the licensee, the investigator shall not use a threat of a departmental audit or the filing of a complaint with the district attorney to effect resolution of the complaint.
  • Departmental employees are made aware of dealers’ concern for good customer relations. It should be clearly explained (on DMV initiated customer interviews) that the Department li­censes and routinely inspects dealers; merely contacting a customer does not mean there is anything wrong with a dealer or his or her transactions. All information received from the customer, positive or negative, shall, be included in the report.
  • Investigators, by the nature of their work, should be assertive and inquisitive, but there is no ex­cuse for anyone to be abusive. The Department expects investigators to conduct themselves in a courteous, polite, and professional manner.

In the event that any dealer feels that an investiga­tor has violated any of these former guidelines or otherwise acted in an abusive or unprofessional manner, the dealer should report the incident to the supervising investi­gator of his or her district or directly to the office of the Chief of Compliance in Sacramento and should re­quest a written response to the complaint and the ac­tion that has been taken by the Department in con­nection with the complaint. The four guidelines listed above are not phrased in exactly the way they were formerly, but are stated in more general terms.

Recommended ­Actions for Dealer under Review

Once a dealer has been advised that the DMV in­tends to conduct a review of the dealership, it is es­sential that the dealer give the matter utmost attention. In view of the fact that the review may ultimately lead to the filing of an accusation, the dealer should keep the dealership attorney advised of the course and scope of the review. The following recommendations are not in­tended as a substitute for, or to supersede, the advice of your attorney and are to be considered only as general guidelines of what to do in the event of a DMV review of your dealership:

  1. The threshold question will be whether or not you volunteer to produce specified records for the in­vestigators or insist that records will only be pro­duced if subpoenaed, and it is strongly advised that you consult your ­attorney in this regard. If a decision is made to permit an ­inspection of re­cords, with the exception of the report of sale books, insist in advance that the investigators provide you with a written list of the files and documents that they wish to review and arrange a mutually convenient time for the inspection. If the investigators attempt to argue with you about your ­request for either a list of files and/or the time of the inspection, you have every right to in­sist upon notice of the specific documents re­quested and a reason­able time to produce them. You may point out to them that if they had to subpoena the records, you would be given time to respond to the subpoena after one was finally prepared and served, and the records sought would have to be specified in the subpoena in any event.
  2. Never permit investigators to go through your files at random. They are not entitled to go on a fishing expedition through your records.
  3. Always have a responsible employee in the pres­ence of the investigators during their inspection of records.
  4. Assist the investigators in making copies of re­quested documents. In this way you will know ex­actly what records they deem of significance and you should keep a separate duplicate file for your attorney of records copied by the DMV.
  5. A list of sales jackets reviewed by the investiga­tors should be kept.
  6. If a customer calls and advises someone at your dealership that he or she has been contacted by the DMV, you should personally talk to the customer or have one of your managers talk to the customer and obtain as much detail as you can get from the customer about what was said. As a general rule, resolve any legitimate customer complaint related to the review at the earliest possible moment it comes to your attention and do not wait for the conclusion of the review; however, there are situations where based on the nature of the dis­pute, your resolution of the complaint might be deemed an admission, so obtain your attorney’s concurrence before reaching a resolution of the dispute.
  7. Do not permit the investigators to interview your personnel regarding a sales transaction or busi­ness practice without giving you advance notice of their request and the subject matter of the request and so advise your employees. You or your man­ager should be present at any such interview and a memorandum made of same. As to whether to permit the interview depends on the circumstances of each case and your attorney should be con­sulted if you are in doubt.
  8. Because your sales personnel are also licensees, they may be the focal point of an investigation and the investigator should let you and any salesperson involved know who is being investigated.
  9. Finally, unless you are absolutely convinced that the calling in of a particular employee will help clarify a matter in your favor, do not volunteer or permit any of your employees to be questioned at the resume for the reasons previously stated (See the subsection to “How The Review Is Con­cluded” entitled “The Dealer Resume” contained earlier in this chapter).

Once a dealer review has been completed and a report prepared, even assuming administrative action has been recommended, the actual filing of an acc­usation may be delayed as much as six months to even a year depending upon the urgency the Division of Compliance attaches to the manner, the time it takes for the preparation of the evidence, and the backlog that exists in the legal section of the De­partment.

Accusations

Proceedings before Hearing

Authority for Filing of Accusation

The DMV, after notice and hearing, may suspend or re­voke the license issued to a dealer for any of the reasons given in the statute. Every hearing shall be con­ducted pursuant to the pro­visions of the Administra­tive Procedure Act covering administrative adjudication found in Government Code Sections 11500 and following. These provisions are designed to af­ford a dealer constitutional due process. Government Code section 11503 provides that the method by which a hearing is initiated to revoke or suspend a license is the filing by the Department of an accusa­tion.

Content of Accusation

The accusation shall set forth in ordinary and concise language a written statement of charges to place the dealer on notice of the acts or omissions with which the dealer is charged sufficient to enable the dealer to prepare a defense. The accusation must also spec­ify the laws and regulations the dealer is alleged to have violated, but shall not consist merely of charges phrased in the language of those statutes and rules. Throughout the accusation and the proceedings, the dealer is referred to as the respon­dent and the accusation is titled “In the Matter of the Accusation Against (name of dealer) Respondent” under the heading of the Department of Motor Vehicles. The accusation is signed by the Depart­ment’s Chief, Division of Investigations and Occu­pational Licensing.

If the dealer has previously been disciplined by the Department, the accusation will usually recite this fact and a copy of the prior decision imposing dis­cipline is attached to the accusation and later intro­duced into evidence on the issue of the penalty to be imposed. The accusation uniformly prays for a revo­cation or suspension of the Re­spondent’s license, which is the only remedy available to the Depart­ment. It thus appears that the Department does not have authority to seek punitive damages, money damages or costs, in­cluding the cost of the Department’s investigation and witness fees.

Grounds for Accusations in Filing Against New Car Dealers

The grounds upon which an accusation may be brought extend to almost the entire spectrum of deal­ership operations. The Vehicle Code sets forth a list of the grounds for suspending or revoking a dealer’s or manu­facturer’s license, the majority of which pertain to dealers. These grounds incorporate a wide range of laws and regulations which, if vio­lated by a dealer, may lead to the filing of an acc­usation and license discipline. Included among these grounds are the following:

  1. Filing of any false information with the Depart­ment or concealing any material fact in con­nection with any application for a dealer’s license or in any application for registration of a vehicle;
  2. Misuse of dealer plates;
  3. Failure to transfer title to a transferee lawfully entitled thereto;
  4. Knowingly purchasing, selling, or otherwise acquiring or disposing of a stolen vehicle;
  5. Failure to comply with the vehicle registration re­quirements and requirements for the use and filing of reports of sale and payment of fees as required by Division 3 of the Vehicle Code;
  6. Violation of Vehicle Code sections 11700 through 11740 and Regulations adopted pursuant thereto. (These sections contain the many dealer prohibitions, which in­clude the truth-in-advertising statutes and regula­tions adopted thereunder);
  7. Violation of the Automobile Sales Finance Act commencing with Civil Code section 2981. The requirements of Automobile Sales Finance Act governing conditional sale contracts and which also encompass the disclosure re­quirements of Regulation Z (Truth-In-Lending) are discussed in detail in the chapter on the Auto­mobile Sales Finance Act in this Management Guide;
  8. Violation of the Vehicle License Fee Law (Revenue and Taxation Code Sections 10701 et al.);
  9. Violation of any of the terms or provisions of Health & Safety Code Sections 43151, 43152, 43153, or 44072.10(b) dealing with air pollution control and certification of vehicles meeting California’s air pollution control standards. These sections have been enforced by the California Air Resources Board by way of an action for injunctive relief and civil penalties brought by the office of the Attorney General. Violations of these sections can also be grounds for license discipline. These sections in general prohibit the acquiring or importing of new vehicles for resale or the sale of new vehicles which are not certified as meeting California’s stricter emission control standards. For purposes of these sections, a motor vehicle with an odome­ter reading of less than 7,500 miles is conclusively pre­sumed to be a new vehicle unless the vehicle is a “new direct import vehicle,” that is, a vehicle manufactured in another country and not intended for sale within the United States. A new direct import vehicle, regardless of mileage, is conclu­sively pre­sumed to be a new vehicle for the pur­poses of these sections if it is less than two years old. In the case of People ex rel. State Air Resources Bd. v. Wilmshurst, the court upheld the validity of this statute. The court also upheld the judgment of the trial court assessing a penalty against the dealer individually and the dealer corporation, rejecting the argument that this was an unconstitutional double punishment. The court said: “If both may be liable for the violations, then each must suffer the consequences of the violations.”
  10. Submitting bad checks to the Department for any obligation or fee due the state;
  11. Any act or omission which has caused any per­son to suffer any loss or damage by reason of any fraud or deceit practiced on that person in the course of the dealership business.

The last of the grounds listed is in bold print because this is perhaps the most serious and frequently a ground for license discipline along with false and misleading advertising. The Department over recent years has shied away from bringing or basing an accusation upon technical violations, vio­lations due to sloppy paperwork, or violations in­volving simple negligence unless these violations have occurred in relatively large numbers or have continued to occur after a warning letter from the Department. Instead, the Department has concen­trated on cases which require some meaningful dis­cipline, such as an actual license suspension for a day or more, and these types of violations most fre­quently involve situations where a customer has been caused a monetary loss or where false and mislead­ing advertising forms the basis for the complaint, or both. When the Department does file an accusation on these grounds, however, it also as a matter of practice throws in any technical violations or viola­tions due to sloppy paperwork that may be found to exist, which when considered along with the other violations serves to enhance the chances of an actual license suspension.

It should be stressed that to be held responsible for “fraud” or “deceit” as those terms are used in Vehi­cle Code section 11705 (a)(14), there is no require­ment that the alleged misrepresentations be made with fraudulent intent; negligent misrepresentations will suffice. Failure to disclose a material fact inten­tionally or due to gross neg­ligence is likewise in­cluded within these terms. The responsibility of the dealer for the acts and omissions of the dealership employees must also be considered in guarding against potential license discipline. Fraud is defined in this section as follows: For purposes of this paragraph, “fraud” includes any act or omission which is included within the definition of either “actual fraud” or “constructive fraud” as defined in Sections 1572 and 1573 of the Civil Code, and “deceit” has the same meaning as defined in Section 1710 of the Civil Code. In addition, “fraud” and “deceit” include, but are not limited to, a misrepresentation in any manner, whether intentionally false or due to gross negligence, of a material fact; a promise or representation not made honestly and in good faith; an intentional failure to disclose a material fact; and any act within Section 484 of the Penal Code.

Typical Dealer Violations

According to the DMV, typical violations for dealers are:

  • failure to transfer title/registration to the buyer
  • failure to pay-off a trade-in when doing so is agreed upon
  • failure to return a down payment or trade-in when the buyer is not approved for credit
  • failure to pay lienholders for vehicles after sale to retail customers
  • failure to display an FTC Buyers Guide on used vehicles for sale
  • misuse of dealer Report of Sale books and supplies
  • failure to refund excess DMV fees to the buyer
  • selling vehicles which do not comply with Vehicle Code smog, safety, and equipment requirements
  • negotiating the terms of a contract and then adding charges to the contract without first disclosing and receiving customer consent for the added charges
  • falsifying information provided on credit applications
  • false or mis­leading advertising
  • failure to sell at the advertised price
  • false savings claims
  • deceptive incentive ad­vertising
  • advertising a vehicle not available for sale
  • failure to with­draw an ad within forty-eight (48) hours of a sale of the advertised vehicle or vehicles
  • misrepresentations relating to a vehicle being sold
  • misrepresentation of a used vehicle as new
  • misrep­resentation of a vehicle as being a demon­strator when it is not
  • filing of false certificates of non-operation
  • filing of false dates of sale
  • employment of unlicensed salespersons
  • overcharging of DMV fees
  • failure to provide the customer with an inspection sheet when a certified used vehicle is sold
  • failure to renew DMV license
  • failure to properly display the dealer and salesperson licenses
  • failure to report to the DMV the hiring and termination of salespersons

Although seldom the sole basis for an accusation, frequently the failure to refund DMV overcharges is alleged in accusations. This is almost always due to carelessness; however, it is extremely embarrassing when it comes up at a hear­ing on an accusation, and every dealership should have a procedure which ensures that DMV overchar­ges are promptly refunded.

DMV enforcement officials have advised CNCDA personnel in recent years that the DMV has noticed increased dealer non-compliance in the following areas:

  • Failure to Disclose Dealer Participation Affecting Cost. If a factory incentive program requires the dealer to contribute to the incentive program, the dealer must clearly and conspicuously disclose this fact in any advertisement of the program.
  • Making an Underselling Claim Without Survey to Substantiate Claim. Dealers may not make any underselling claim, such as “we have the lowest prices,” or “we will beat any dealer’s price” unless the dealer has conducted a recent survey showing that the dealer sells its vehicles at the lowest prices in its trade area, and maintains records to substantiate such claims.
  • Advertising Free Merchandise, Services, or Gifts with Purchase. Dealers are prohibited from advertising free goods or services provided by the dealer contingent upon the purchase of a vehicle. This prohibition also extends to offering goods or services below the dealer’s cost. In some circumstances, advertising certain vehicle-related goods or services (e.g., truck bedliners) as “included in price,” or “included with purchase” is permissible.
  • Rebate Stacking. One of the noticeable compliance issues for dealers is the advertising of various rebate programs by including several available (sometimes conflicting) rebates in the arithmetic to arrive at an artificially low price for which very few, if any, consumers would qualify. DMV’s enforcement team is aware of this practice and actively investigates dealerships about this.
  • Failure to Report Salesperson Employment or Termination within 10 Days. Within 10 days of hiring a salesperson or the salesperson leaving a dealer’s employ, the dealer must file DMV Form OL 16-A with DMV Headquarters. While this law had not been regularly enforced in previous years, DMV is beginning to check compliance. This form is available for printing and mailing to DMV on the DMV’s website, www.dmv.ca.gov, by searching for “salesperson change of employment.” For more information on this requirement, see the discussion in Chapter in this Guide entitled Dealership Opening, Closing, and Licensing.
  • Failure to Pay Lien on Trade-In Vehicle within 21 Calendar Days. In the midst of the vehicle sales depression during the 2008 economic crisis, a number of dealers failed to pay off liens on customer trade-ins. This problem was spotlighted in several high-profile media accounts at that time. In response, the Legislature passed a law requiring dealers to pay, within 21 calendar days of acquiring the vehicle in trade, the agreed-upon amount of a credit or lease balance on the traded-in vehicle, or the entire credit or lease balance amount (if no amount was specified). For more information on this requirement, see the discussion “Trade-in Payoffs: 21 Day Deadline and Other Rules” in Chapter on Other Important Topics.
  • Certified Used Car Inspection Reports. As part of the Car Buyers Bill of Rights, the Legislature in 2005 put restrictions on the then-unregulated sale of Certified Used Cars. Used car dealers, in particular, would label inventory as certified, despite the complete lack of any certification program. While the Car Buyers Bill of Rights didn’t put together a list of standards that vehicles must meet to be sold as certified, it did prohibit selling vehicles with certain characteristics (such as tampered odometers, frame damage, or branded titles) as certified. One key requirement of the Car Buyers Bill of Rights is that dealers must provide customers with a completed inspection report showing all of the components that were inspected as part of the certification process prior to selling the vehicle. The law doesn’t specify what needs to be put on the inspection report, but states that the report must disclose which components were inspected. The failure to provide this report was specifically highlighted by the DMV official when asked about new car dealer compliance problems. Since most, if not all, factory-sponsored certified used car programs contain a checklist of inspected components, make sure that your staff is fully aware of this requirement and that the checklist is provided to the customer prior to sale.
  • Credit Card Processing Fees. Sometimes after the contract is signed, a frequent flyer mile-hungry customer says that he or she will use a credit card to pay for a large down payment, or even the vehicle itself–requiring the dealer to absorb a 2-3% transaction fee. The first instinct of a salesperson may be to attempt to recoup this transaction fee by renegotiating the transaction to pass the fee on to the customer, or to simply deny the use of a credit card. Dealers need to keep in mind a few things when handling credit card payments:
    • Hidden Finance Charges. If a dealer imposes a fee for the use of a credit card, or increases the price of the vehicle to recoup the transaction fee, the increased amount may be considered an undisclosed or hidden finance charge under the federal Truth in Lending Act and appropriate disclosures would have to be made.
    • Credit Card Surcharge Prohibition. California Civil Code Section 1748.1 specifically prohibits retailers from imposing a surcharge on a cardholder but allows for retailers to offer discounts to induce payment by alternative means. However, in 2018 the Ninth Circuit Court of Appeal ruled that the prohibition in Section 1748.1 violated the First Amendment to the U.S. Constitution as applied to the Plaintiff sellers.
    • Credit Card Agreements. In addition to the more serious legal prohibitions, most credit card agreements strictly prohibit merchants from imposing a surcharge to recoup the transaction fee–mandating that credit card purchases be charged as any other purchase but allowing for cash discounts. Furthermore, some credit card agreements prohibit merchants from imposing a maximum transaction amount for acceptance of a credit card. Dealers should check their credit card agreements to determine which rules affect the use of credit cards in purchasing a vehicle.

While state and federal laws permit providing discounts for purchases paid in cash or by check, this becomes difficult to implement during a negotiated transaction because whether the discount is a true cash price reduction becomes unclear. When seeking to establish policies governing the acceptance and use of credit cards be sure to consult with competent legal counsel.

CAUTION

Regarding Owners: Existing grounds for license discipline carry over to new own­ers of a dealership after stock purchase.

The vast majority of dealer licenses are issued in the name of a corporation. When a dealership changes hands by way of a sale of the stock of the dealership corporation, the dealer license, having been issued to the corporation, remains the same; there is simply a change in the ownership of the cor­poration. Accordingly, if grounds for discipline exist against the dealer license by reason of the activities of the selling owner, they continue to exist notwith­standing that the new owner was not personally re­sponsible for the prior wrongful acts and knew nothing about them, and notwithstanding that there has been a complete change in the officers and man­agement of the corporation. These facts may be considered as mitigating evidence insofar as the penalty is concerned; however, they do not constitute a defense. The same rule would apply in the transfer of interests in other legal entities such as a limited liability company.

Furthermore, since the licensing laws do not pro­vide a means for disciplining the prior owner and/or management except by means of action against the license, if the prior violations were of a serious na­ture, the Department would be strongly motivated to pursue an accusation against the corporate license. Further, an application for a dealer’s license may be refused if the applicant was an owner or manage­rial employee of a dealership whose license was re­voked and never reissued, or was suspended and the terms of suspension have not been fulfilled.

And if an applicant was a managerial employee of a dealer and a person under his or her control committed acts resulting in a revocation or suspension of a dealer license, a salesperson license can be refused to that managerial employee. Accord­ingly, if the DMV pursues an accusation against the dealership license after the change of ownership, and obtains, for example, a suspension stayed on terms of a two (2) year probation, and the prior owner and/or manager then applied for either a dealer’s or salesperson’s license, the DMV could deny the appli­cation.

Also, on a change of ownership by reason of a stock sale as opposed to a sale of the assets of the dealership to a new corporation, the corporation re­mains civilly liable for wrongful acts of the corpora­tion committed prior to the change of ownership upon actions brought by customers, who were dam­aged by the prior conduct or upon an action brought for civil penalties and/or an injunction by the con­sumer protection sections of the offices of the Attor­ney General, District Attorney or City Attorney.

Therefore, it is essential that before entering into a stock purchase agreement to acquire a dealership that the DMV be contacted for confir­mation that the dealership being acquired is not under investigation and that there is no action pending or contemplated against the dealership license. One factor which frequently motivates a stock purchase rather than an asset purchase is the benefit of a loss-carry forward and yet, the fact a dealership had been suffering losses is often indica­tive of lack of effective control or management, which are factors which frequently lie at the root of violations supporting an accusation.

Filing and Service

Filing Date and Statute of Limitations

Although all hearings on accusations are conducted by Admin­istrative Law Judges on the staff of the Office of Administrative Hearings established by the Adminis­trative Procedure Act, the Act makes no provision for the mechanics of the filing of an accusation. The filing date of an accusation is deemed to be the date that the Depart­ment itself stamps upon the face of the accusation, which in practice is done by the legal section of the Department after it has prepared and obtained the appropriate signatures to the accusation. It appears that there is no statute of limitations for the filing of an accusation by the Department; however, upon petition to the Superior Court, an accusation may be dismissed if there has been prejudicial delay in the filing of the accusation or in the prosecution of the accusation following its filing by the Department. For purposes of this determination, the filing date is the Depart­ment’s own stamped date and not the date that the accusation is sent to the Office of Administrative Hearings.

Service of Accusation, Required Accompany­ing Documents, Notice of Time and Place of Hearing and DMV Report

Following the preparation, signing and date stamping of the accusation, the Department serves the accusation upon the dealer. This may be done by any means selected by the Department, but in prac­tice is usually done by regi­stered mail or by personal service.

The Department must include with the accusation a Notice of Defense which when signed and returned to the De­partment by the dealer, constitutes a valid answer to the accusation and a request for a hearing. The acc­usation when served also must be accompanied by copies of Government Code Sections 11507.5, 11507.6 and 11507.7 which explain the dealer’s right to discovery.

A notice that the dealer has 15 days to file the Notice of Defense attached or one which complies with Government Code section 11506 within 15 days from the date of service of the accusation must likewise be included, together with a statement that if no Notice of Defense is filed, the Department may proceed against the dealer’s license without a hearing. The Notice of Defense may be signed by the dealer or an officer of the dealership or by the dealer’s attorney and it need not be verified.

In practice, the DMV periodically receives blocks of time reserved by the Office of Administrative Hearings for hearings on DMV accusations. The DMV sometimes at the time it serves the accusation also serves a notice of time and place of hearing. Copies of the accusation and this notice of time and place of hearing are filed with the Office of Adminis­trative Hearings at the same time the dealer is being served.

The DMV as a matter of practice also serves a re­quest for discovery upon the dealer at the time of service of the accusation and further provides the dealer with a copy of the DMV investigators report.

Responsive Pleadings by Dealer

The dealer served with an accusation must file a response and request for hearing with the Depart­ment within fifteen (15) days of the date of service of an accusation. This is normally done simply by signing the Notice of Defense which is served with the accusation and returning it to the address clearly indicated for that purpose in the papers served upon the dealer by the Department. Although the dealer may sign the No­tice of Defense, it is strongly recommended that the dealer deliver all of the papers with which he or she was served to his or her attorney and have the attorney sign and file the Notice of Defense. It may well be that the attorney will want to object to all or portions of the accusa­tion and raise certain special defenses or file a miti­gating statement.

The Notice of Defense serves as a general denial of all of the material allegations of the accusation; however, in addition to filing this Notice of Defense, the Government Code permits an objec­tion to an accusation upon the ground that it does not state facts or omissions upon which the Depart­ment may proceed, an objection to the form of the accusation on the ground of uncertainty, and the raising of affirmative defenses. Although Adminis­trative Law Judges are generally extremely liberal in permitting attacks on the sufficiency of the allega­tions and in permitting evidence on matters which more properly should have been raised affirmatively in the Notice of Defense, it is far better not to take any chances and to raise such matters along with the basic Notice of Defense. A claim that the allegations are uncertain, however, should always be raised at the outset or the party failing to raise it may be pre­cluded from doing so at the time of the hearing on the ground that no opportunity was afforded the De­partment to correct the uncertainty. A mitigating statement may also be filed, but it is not necessary to the introduction of mitigating evidence and is there­fore seldom utilized.

In practice, issues relating to the sufficiency of the allegations to state a cause of action are normally not ruled upon until the time of the hearing and is­sues relating to uncertainty are usually settled before the hearing between the parties. There is nothing to prevent the parties, however, from requesting a hearing in advance of the trial date to resolve issues relating to the pleadings and, where the pleading is­sues are significant, it is recommended practice.

Discovery

The Government Code provides the exclusive method for discovery in administrative hearings and it differs significantly from discovery in civil pro­ceedings. Depositions, interrogatories and requests for admissions are not used with the limited excep­tion that a deposition may be taken and used in lieu of testimony when the witness is unavailable at the hearing and cannot be compelled to attend the hearing.

Discovery, other than depositions, is limited to the parties themselves, that is, to an exchange between the parties of the items listed in the Government Code as being discoverable. Discovery is permitted as to the following: the names and addresses of witnesses known to the other party, including, but not limited to, those intended to be called to testify at the hearing; the right to inspect and copy statements taken from third party witnesses such as a dealer’s customers; statements of witnesses proposed to be called and of others having personal knowledge of the acts or omissions or events which are the basis for the proceeding not otherwise in­cluded above; all documents or writings relevant to the proceedings; and certain portions of the Depart­ment’s investigative reports. The DMV as a matter of practice, however, makes all of its investigative reports available.

Discovery must be requested within thirty (30) days from the date of the service of the accusation, and in the case of the service of an amended accusa­tion, within fifteen (15) days as to any new matters alleged. It is initiated by a simple written request for discovery sent by ordinary mail and need not specify more than that the serving party requests the names of all witnesses and statements and writings discov­erable under Government Code section 11507.6. There is no time specified in the Code as to when a response must be given to a request, but certainly the response should be provided in sufficient time to en­able the requesting party to prepare for trial.

Although the Department supplies copies of its in­vestigative report to the dealer at the time of the service of the accusation, the dealer should still at the time the Notice of Defense is filed also serve an all-encompassing request for discovery. The allega­tions of an accusation specify that the violations al­leged are related to a numerical listing of vehicles by I.D. number contained in a schedule or schedules attached to the accusation. The names of the cus­tomers whose transactions with the dealer involved each vehicle listed and the date of sale where appli­cable are included in the schedule. With respect to each item number listed on the schedule, the DMV in­vestigators prepare a separate corresponding num­bered “evidence folder.” This evidence folder con­tains the originals or copies of all documents the De­partment intends to rely upon to prove the allega­tions of the accusation relating to that particular item including relevant portions of its investigative report and any statements of witnesses. Upon re­quest, the Department is ­required to permit you or your ­attorney to review these evidence folders, and this is normally a must for a proper defense of the action.

Failure to make a formal request for discovery waives the right to compel discovery in the event that the Department does not furnish a dealer with all of the items discoverable under Go­v­ernment Code section 11507.6, and would further waive the right to object to the introduction of otherwise relevant evidence upon the ground that it was not furnished to the dealer before the hearing. A party claiming that a request for discovery has not been complied with may file a motion with the administrative law judge to compel disclosure of the information sought.

PRACTICAL TIP

Obtaining The Names Of All Customers Inter­viewed: It should be noted that discovery is not limited to witnesses intended to be called by the Department, but extends to witnesses to the sub­ject matter of the accusation whether intended to be called or not. This fact, coupled with the De­partment’s own guidelines for its investigators that they should include in their report all infor­mation received from the customer, positive or negative, may be used to the benefit of the dealer.

Quite frequently, the DMV, if it intends to inter­view a number of a dealer’s customers, sends a letter or card to the customers asking them to contact the Department. The question arises as to how many customers the investigators interviewed before com­ing up with the few who will testify at trial. Al­though required to do so, it appears that investiga­tors seldom report interviews with customers whose account of their dealings is favorable to the dealer. Demanding in advance of hearing the names of all customers interviewed and/or the names of all cus­tomers to whom letters or cards were sent, and the subsequent interviewing of such customers, may not only turn up evidence favorable to the dealer, but may also provide a basis for establishing bias on the part of the investigators and thus, taint the Depart­ment’s entire case. For example, assume that the De­partment brought three or four counts alleging that the dealer represented unwinds as new cars. It may well be that the DMV interviewed twenty-five purchasers of unwinds during the period under investigation and the remaining twenty-one or twenty-two customers all clearly un­derstood that they were buying used cars. Establishing these additional facts not disclosed in the investigator’s report would not only tend to discredit the stories of the three or four complaining witnesses but would also tend to discredit the Depart­ment’s entire case.

Administrative Procedures Act of 1995

In the 1995-1996 legislative session, California enacted Chapter 938 which contains many new provisions regarding administrative adjudication hearings. The following is a brief overview of some of these laws:

  • With the consent of the parties, the DMV may refer a dispute that is the subject of an adjudicative proceeding for resolution through mediation by a neutral mediator, or binding arbitration by a neutral arbitrator or nonbinding arbitration by a neutral arbitrator.
  • The Act contains what is known as an Administrative Adjudication Bill of Rights. The Bill of Rights provides for such matters as public observation of the hearing; separation of the adjudicative function from the investigative, prosecutorial, and advocacy functions within the DMV; the subjecting of the presiding officer to disqualification for bias, prejudice, or interest; and other procedural due process safeguards.
  • While an adjudicative proceeding is pending there is to be no communication, direct or indirect, regarding any issue in the proceeding, to the presiding officer from an employee or representative of the DMV without notice and opportunity for all parties to participate in the communication.
  • Language assistance must be provided in the proceeding if necessary. There are general procedural provisions.
  • Procedures are provided for an informal hearing in a manner that is simple and more expeditious than regular hearing procedures. There is a specific statutory authorization for the use of the informal procedure when a disciplinary sanction against a licensee does not involve an actual revocation of a license or an actual suspension of a license for more than five days.
  • There are detailed provisions for the issuance of subpoenas
  • Contempt sanctions are available in adjudicative proceedings in specific situations.
  • Procedures are set forth for the conduct of adjudicative proceedings when there is an immediate danger to the public health, safety, or welfare that requires immediate agency action
  • A person may apply to the DMV for a declaratory decision or ruling concerning the applicability to specific circumstances of a statute, regulation or decision within the primary jurisdiction of the DMV. The DMV has discretion not to issues such a ruling.

Hearing ­Procedure

Formality and ­Chronology of Hearing

Although hearings on accusations are somewhat less formal, the proceedings are conducted substan­tially the same as those em­ployed in municipal or superior court non-jury civil trials.

The hearing is presided over by an Administrative Law Judge em­ployed by the Office of Administrative Hearings and who functions much as a judge functions at a civil court trial. Administrative Law Judges must be at­torneys admitted to practice law in the State for a minimum of five (5) years. Prior to the hearing, a pre-hearing conference and/or settlement conference may occur.

The hearings are normally held at the Office of Administrative Hearings nearest to the dealer’s loca­tion and if such an office is not nearby, the Adminis­trative Law Judge will travel to a location nearby where some public building has space available for the hearing.

The Administrative Law Judge calls the matter for hearing and asks the parties and their counsel to identify themselves for the record. The pleadings are next marked as exhibits and made a part of the record and the Administrative Law Judge generally takes judicial notice of the status of the dealer and the Department.

After the parties are given an opportunity to make opening statements, the DMV, which has the burden of proof on accusations, then presents its evidence by calling witnesses and introducing relevant docu­ments. The DMV’s witnesses normally include the Department’s investigators and the dealer’s custom­ers. After the Department concludes its case, the dealer puts on evidence both in defense of the case and in mitigation at the same time. Each side is permitted rebuttal and closing argument and the case is then taken under submission by the hearing offi­cer.

Distinctions between ­Accusations and Other Proceedings

When Dealer May Be Called as Witness

Unlike at a civil trial where the plaintiff may dur­ing the presentation of the case call the opposing party to the stand, at hearings on accusations the DMV cannot call the dealer or its officers as wit­nesses until the dealer has had the opportunity to present his or her case. Thus, a dealer may attend the hearing and listen to the De­partment’s case without the fear of suddenly being called as a witness. Once called as a witness by the dealer’s own attorney, however, the dealer is subject to cross-examination by the Department’s attorney. Furthermore, unlike criminal procedure, the Department may subpoena and compel the dealer and the dealership officers to testify after the dealer has presented a defense whether or not they have taken the stand as part of the defense. The dealer’s attorney may thus have the strategic option to keep a dealer and/or one or more of the dealership officers, if not subpoenaed, away from the hearing.

Liberal Rules of Evidence and Admissibility of Hearsay

The rules of evidence at administrative hearings are generally much more liberal than at civil trials. Although adherence to the strict and technical rules of evidence is not required, counsel nevertheless should be prepared to produce to the extent feasible the same type of evidence he or she would introduce at a civil trial. The degree to which the stricter rules of evidence are applied varies with Administrative Law Judges and the better the form of the evidence, the more likely it will be favorably received or re­viewed in the case of an appeal.

Hearsay evidence is admissible to supplement or explain other evidence and is freely admitted at ad­ministrative hearings subject to one important quali­fication, namely, that a finding cannot alone be supported by what in court would be inadmissible hearsay evidence. For this reason, objections should always be made to the introduction of hearsay evi­dence.

Although the objections will generally be overruled, they do have the effect of pointing out to the Administrative Law Judge the limited value of the evidence and they will preserve a later motion to strike the hearsay evidence where it has been the only evidence introduced to support a finding on a particular issue. An objection is also timely if made before submission of the case or on a reconsideration.

Cross-Examination and ­Impeachment of Witnesses

At hearings on accusations, another party’s wit­nesses may be cross-examined on any relevant topic irrespective of the limited scope of the direct testi­mony of such witnesses. Also, at hearings on accu­sations, a party may impeach the party’s own witnesses without the necessity of showing surprise or damage.

Use of Affidavits

A party may introduce the testimony of a witness by way of an affidavit made under the penalty of perjury in lieu of the witness appearing at the hear­ing provided a copy of the affidavit is mailed to the other party at least ten (10) days before the hearing with a notice that the other party has the right to de­mand cross-examination of the witness within seven (7) days. If a demand for cross-examination is made, the witness must be produced by the other party for cross-examination and, if this happens, generally the witness is put on the stand for his or her direct ex­amination instead of introducing the affidavit.

If the witness is not produced for cross-examination, the affidavit may be introduced in evidence, but shall be given only the same effect as other hearsay evidence.

At one time, the Department made extensive use of affidavits of customers; however, this practice has almost been completely abandoned because the DMV investigators lacked the skill to properly pre­pare them and their use gave to the dealer’s attorney a tremendous tactical advantage. Affidavits are still used to present evidence of DMV procedures and to authenticate DMV records in Sacramento where there is no real need to cross-examine the witness.

CAUTION

Regarding Affidavits: If the Department does intend to use affidavits at the hear­ing, it normally would serve the affidavits with the accusation. A dealer should not be misled by the fact that there are fifteen (15) days within which to file a notice of defense; only seven (7) are allowed to demand cross-examination of witnesses and this right to compel the Department to produce the witnesses is waived unless the demand to cross-examine is mailed within seven (7) days. Therefore, it is es­sential that a dealer carefully review all of the papers with which he or she is initially served, and if affidavits of witnesses are included, the dealer should immediately consult an attorney.

The Administrative Law Judge’s Decision

The effect of the Administrative Law Judge’s de­cision is so significantly different from the decision of a judge in a civil proceeding that it is discussed as a separate topic later in this chapter.

Trial Tactics and the Use of Mitigating Evidence

Although a dealer at a hearing on an accusation naturally makes every effort to show that the dealer­ship has not committed the violations alleged in the accusation, it is seldom the case following a hearing that there are not at least some violations found to exist.

The question of penalty thus may be the most important matter in the case. Since the finding of almost any violation routinely results in the dealer being issued a probationary license, the primary consideration for the dealer is to avoid any actual suspension of the dealership license which necessitates the shutting down of the dealership’s sales activities.

Because of the severe impact even a relatively brief suspension may have on a dealership’s busi­ness, the presentation of mitigating evidence is of the utmost importance at these hearings.

A threshold decision should be made at the outset as to whether to admit certain alleged violations and simply offer evidence in mitigation. A dealer is nor­mally better off admitting allegations to which he or she has no valid defense and concentrating on presenting mitigating evidence. Attempting to deny the obvious serves only to weaken the dealer’s entire defense.

Consideration must also be given to what facts will come out in the hearing in connection with the Department’s attempted proof of an allegation in the accusation. Standing alone, a particular allegation as it appears in the De­partment’s pleadings may not seem too bad, but if the issue is contested, certain facts may get into evidence which put the dealership in a more unfavorable light. If the allegation is ad­mitted, the dealer’s attorney will more likely be able to keep the more unfavorable facts from getting into evidence.

EXAMPLE

A classic example of the wisdom of the forego­ing suggestions may be found in a Court of Ap­peal decision involving a dealer who attempted to disprove that his dealership overcharged DMV fees on nine occasions. Had he merely admitted the nine overcharges and showed that refunds were later made to the customers and that he had est­ablished some procedural changes to lessen the chances of over­charges and to ensure prompt payment of refunds, the case never would have gone to an appeal. In attempting to rebut the proof of the overcharges, the dealer produced evidence of the dealership’s ­accounting proce­dures which ­ultimately revealed that the dealer had a credit balance of some $16,500 at the end of a year’s ­accounting period in the expense account to which the dealer credited refunds, giving rise to an implied finding that there were $16,500 in overcharged DMV fees for the year which had not been refunded. The Court of Ap­peals held that although these implied violations had not been charged, they could nevertheless be considered by the Administrative Law Judge and the New Motor Vehicle Board on Appeal on the issue of penalty and the terms of probation. What would have undoubtedly been a case of straight probation ended up resulting in an actual ten days suspension of the dealer’s license.

Mitigating factors frequently relied upon in hear­ings on accusations are:

  1. Length of time the dealer has been licensed;
  2. Length of time the dealer has been in the auto­mobile business;
  3. Absence of prior discipline;
  4. Restitution to any injured customer (which is par­ticularly helpful to a dealer if the customer was satisfied before any urging to do so on the part of the DMV);
  5. The dealer’s reputation in the industry;
  6. The dealer’s general background and reputation (the use of character witnesses is permissible);
  7. The economic impact on the dealer that a suspen­sion would entail;
  8. The number of employees who would be deprived of work if the license is suspended or if the busi­ness fails because of a suspension;
  9. Efforts made to avoid a repetition of the offense or offenses (this type of evidence is extremely im­portant and should never be overlooked); and
  10. When the offense charged is due to acts of the dealer’s employees, careful hiring practices of the dealer, lack of dealer knowledge notwithstanding an adequate system of supervision, and the ab­sence of the dealer ratification of the alleged wrongful act.

It should be noted that although the dealer may introduce evidence in mitigation, the Department may introduce evidence in aggravation on the issue of penalty. In this connection, the Department may show prior warning letters sent to the dealer, prior discipline imposed on the dealer, the relationship of the dealer and its officers and directors with other dealerships with which they were connected which had been disciplined, related violations of laws and regulations even though not specifically alleged in the Accusation, and various hard­ships suffered by customers caused by the alleged violations.

Recovery of Costs and Expenses

There does not appear to be any provision in the law for the recovery by the DMV in accusation hearings of investigative costs and attorney fees. Vehicle Code section 11705(a) provides that a dealer’s license may be suspended or revoked, and Vehicle Code section 11705(c) requires that such hearings be conducted pursuant to the Administrative Procedures Act. If the DMV claims it is entitled to recover these fees and costs, the dealer or the dealer’s attorney should ask for the legal authority supporting such a claim.

The ­Administrative Law Judge’s Decision and Its ­Approval or Re­jection

The Administrative Law Judge’s Decision is Merely a Recommended Decision

Unlike a decision by a judge ­following a civil trial, which decision constitutes a final adjudication of the case unless appealed, the decision of the Adminis­trative Law Judge is merely a proposed decision submitted to the DMV for its approval and is not binding on the Department. The Department makes the final decision and is thus both prosecutor and judge, although in the vast majority of cases, the Department does in fact adopt the Administrative Law Judge’s recommended decision.

The Administrative Law Judge is required to make a proposed written decision within thirty (30) days following the submission of the case for decision. The thirty (30) days begins to run when the hearing is concluded unless written argument is to be submitted to the Administrative Law Judge, in which case the thirty (30) days begins to run when the final written argument is submitted to the Admin­istrative Law Judge.

The Administrative Law Judge’s decision consists of findings of fact and a determination of issues, that is, a determination whether the facts support each of the alleged violations of law and thus constitute cause for suspension or revocation of the dealer’s li­cense. A proposed order of suspension or revocation is made which usually contains terms of probation, and the decision is submitted to the DMV with a recommendation that it be adopted as the decision of the Department.

Where a suspension is recommended by the Ad­ministrative Law Judge, all or a substantial portion of it is generally stayed upon the express condition that the dealer comply with specified terms of pro­bation. For example, the Administrative Law Judge may propose that the license be sus­pended for fifteen (15) days and that all but three (3) days of the sus­pension be stayed provided that for a one or two year period the dealer be issued a probationary li­cense and abide by specified terms of probation, which if found after notice and hearing to have been violated, may result in a revocation of the probation and imposition of the remaining portion of the actual suspension.

Although the authority to make wide ranging or­ders of probation is extended to the Administrative Law Judge, this authority is seldom used in practice, nor does the Department seek such orders in con­tested cases. The typical terms of probation are that the dealer refrain from further violations of the type alleged and that the dealership abide by all state and federal laws and regulations. (See, however, the section later in this chapter entitled “SETTLEMENT AS ALTERNATIVE TO ACCUSATION HEAR­ING” involving settlements of accusations and the section, LANGUAGE OF DECISIONS, below).

Once a dealer has been issued a probationary li­cense as the result of an accusation, the DMV can­not revoke the probation and impose the stayed por­tion of a suspension or revocation without first pro­viding the dealer with notice and a full hearing on the alleged grounds for revoking the terms of proba­tion. In practice, the DMV does not go out of its way to find grounds for revoking terms of probation and such hearings are rare.

Language of Decisions

The California Code of Regulations provides Occupational and Disciplinary Guidelines for decisions on accusations. It provides as follows:

In reaching a decision on a licensing or disciplinary action under Division 5 of the Vehicle Code and the Administrative Procedure Act (Government Code section 11400, et seq.), the Director of Motor Vehicles or his or her designee shall consider the guidelines entitled “Occupational Licensing and Disciplinary Guidelines” (Rev. 11/2007), which are hereby incorporated by reference, and any and all other sanctions provided by relevant statutes and regulations. Deviation from these guidelines and orders, including standard terms of probation, is appropriate where the Director or his or her designee, in his or her sole discretion, determines that the facts of the particular case warrant such a deviation, for example, the presence of mitigating factors, the age of the case, and evidentiary problems.

The Occupational Licensing and Disciplinary Guidelines referred to in the regulation are posted on the DMV’s website at:  www.dmv.ca.gov and be found using the search feature on the website and searching for “Occupational Licensing & Disciplinary Guidelines.”

The Department’s ­Options regarding the Administrative Law Judge’s Recom­mended Decision

The first option open to the Department upon re­ceipt of the Administrative Law Judge’s recom­mended decision is to adopt it in its entirety. This occurs in the vast majority of cases and usually within thirty (30) days from the Department’s receipt of the proposed decision. The Department may also reduce the proposed penalty and adopt the remaining portion of the decision.

The Department may take either of these actions without reading or reviewing the evidence and without going beyond the informa­tion contained in the Administrative Law Judge’s proposed decision.

The Department has one hun­dred (100) days from its receipt of the Administrative Law Judge’s pro­posed decision within which to approve it or take some other action; and if it takes no action, the pro­posed decision shall be deemed adopted at the expi­ration of the one hundred (100) days. The Depart­ment must, irrespective of any action it takes, file the proposed decision as a public record and serve a copy of it on the dealer and his attorney within thirty (30) days from its receipt of the de­cision from the Administrative Law Judge.

If the Department wishes to reject the proposed decision and make different findings or determina­tions of issues, or if the Department wishes to in­crease the penalty, the Department must order a transcript of the hearing and independently review the evidence, as well as provide the dealer with the further opportunity to present either oral or written argument to the Department. This argument is usu­ally presented directly to the Director. Sometimes the first hint of how the Administrative Law Judge de­cided the case comes when the Office of Adminis­trative Hearings calls the dealer’s attorney and asks the attorney whether he or she wants a copy of the transcript which has been ordered by the Department.

Once the Department makes known its decision that it will decide the case upon its own review of the evidence and requests a transcript of the trial pro­ceedings, the Department must hear further argu­ment, if requested, and decide the case within one hundred (100) days of its receipt of the transcript, which period may be extended thirty (30) days for special circumstances.

Service and Effective Date of Decision

Once the Department has either adopted the Ad­ministrative Law Judge’s decision or made its own decision, the decision must be personally served on the dealer and his or her attorney or be served by registered or certified mail. See Government Code section 11518. The decision becomes effective thirty (30) days after it is delivered or mailed unless the De­partment orders that it become effective sooner or a reconsideration is ordered.

Right to Petition for Reconsideration

The DMV itself may order a reconsideration of all or part of the case on its own motion or on petition of any party. The power to order a reconsideration expires 30 days after the delivery or mailing of a decision to dealer, or on the date set by the DMV as the effective date of the decision if that date occurs prior to expiration of the 30-day period or at the termination of a stay not to exceed 30 days which the DMV may grant for the purpose of filing an application for reconsideration. If additional time is needed to evaluate a petition for reconsideration filed prior to the expiration of any of the applicable periods, an agency may grant a stay of that expiration for no more than 10 days solely for the purpose of considering the petition. If no action is taken on a petition within the time allowed for ordering reconsideration, the petition shall be deemed denied. The case may be reconsidered by the DMV itself on all the pertinent parts of the record and such additional evidence and argument as may be permitted, or may be assigned to an administrative law judge. A reconsideration assigned to an administrative law judge is subject to the procedure provided in Government Code section 11517. If oral evidence is introduced before the DMV itself, no DMV personnel may vote unless he or she heard the evidence.

Effect of License ­Discipline Upon Dealer and Officers

In addition to the actual discipline imposed upon a dealership as the result of an accusation, the officers, directors, and managerial em­ployees of the dealer­ship may be denied a dealer’s or salesperson’s license, or a corporation with which they are affiliated may be denied a dealer’s license in connection with sub­sequent applications. This topic is discussed later in this chapter.

CAUTION

A Dealer Cannot Avoid Discipline By Surrendering The Dealerships License: The foregoing consequences cannot be avoided by vol­untarily surrendering a dealership’s li­cense which may be threatened by an ac­cusation. The Vehicle Code specifically provides that the surrender of a dealer’s license or the dealer’s cessation of business shall not prevent the filing of an accusation for the revocation or suspen­sion of the surrendered license.

Settlement – Alternative to Accusation Hearing

Once an accusation has been filed, consideration should always be given to a possible settlement with the Department. The basic reasons for attempting to settle an accusation are to avoid the risk of what may happen if a hearing is held, and in particular the risk of an actual suspension of the dealership’s li­cense; to avoid the possible damage to the good will of the dealership resulting from the subpoenaing of its customers to testify at the hearing; and to avoid the cost of litigation.

For years a dealer served with an accusation had no alternative to avoid these risks and was forced to trial on the accusation because the Department took the position that it had no authority to enter into monetary settlements; however, starting in approxi­mately 1975, and well before the enactment of Ve­hicle Code section 11707, the Department changed its position and decided that it could enter into monetary settlements. Pursuant to such a settlement, the dealer would stipulate without admitting the truth of the allegations that the Department could estab­lish prima facie proof of the allegations contained in the accusation and stipulate to some form of a sus­pension, all of which would normally be stayed pur­suant to a specified term of probation. By including in the terms of probation an agreement to pay a monetary penalty to the Department and to pay the Department’s investigative costs, and/or an agree­ment to make restitution to certain customers of the dealer, the Department got around the need for spe­cific statutory authority to make such settlements. Some settlements include probation only, without any suspension being mentioned, and some settlements are made without any probation.

Vehicle Code section 11707 specifically authoriz­ing monetary settlements became effective in Janu­ary 1977. As originally enacted, it permitted a monetary settlement only in cases where there were no allegations of fraud or conduct injurious to the public, and such settlements were strictly in lieu of any other form of penalty against the dealer, such as a suspension or the imposition of terms of probation. Vehicle Code section 11707 has, however, been amended over the years so that in its present form, it authorizes settlements similar to those being entered into by the Department prior to its enactment.

Vehicle Code section 11707 requires that the De­partment by regulation establish minimum and maximum penalties for specified types of violations with a ceiling of $1,000 per violation and author­izes the Department to enter into settlements with li­censees which may include, but is not limited to, a period of probation or monetary penalties or both. The regulation establishes three categories of viola­tions. The first category establishes penalties ranging from a minimum of $15 to a maximum of $300 for each violation of some 26 designated Vehicle Code sections; the second category estab­lishes penalties ranging from $50 to $750 for each violation of some 31 designated Vehicle Code sections; and the third category establishes penalties ranging from $100 to a maximum of $1,000 for each violation of some 12 designated Vehicle Code sections.

Settlements under Vehicle Code section 11707 are advantageous to both the dealer and the Department. In substance, the dealer is in a position to buy his or her peace. Where the charges are serious and could, if taken to a hearing, result in an actual suspension of the dealer’s license, a dealer is in the position to avoid the risk of any suspension by payment of a lump sum of money to the Department. The DMV settlements are often constructed to show a number of days of suspension, but allowing the dealer to buy out of the suspension by a certain monetary payment for each day of suspension bought out. In particu­larly serious cases, a dealer might even agree to a one- or two-day suspension to avoid the risk of a much longer suspension.

In the serious cases, the Department will normally insist on at least some pe­riod of probation (usually a year or two) and may insist on restitution to certain customers and pay­ment of the Department’s expenses in conducting the investigation. In the less serious cases, the dealer may by payment of a monetary settlement avoid any terms of probation whatsoever. By making such set­tlements, the Department which is relatively under­staffed in its legal section not only lessens its heavy case load, but also recovers for the benefit of the State the monetary portion of the settlement and its expenses, and in appropriate cases obtains an agreement that restitution be made to injured cus­tomers of the dealer. Since the Department can get none of these advantages if it tries the accusation, the Department is far better off settling cases for money with the exception of those few cases where the public interest demands that the dealer’s license be revoked or suspended for a substantial period of time. Accordingly, the dealer’s attorney in the typical case, where the maximum risk is an actual suspen­sion ranging anywhere from one to fifteen days, should know it generally does not make sense for the Department to try these cases. The actual suspension is not really needed for the protection of the public good, and yet if the Department tries the case, it forgoes the oppor­tunity of recovering the monetary benefits of such settlements for the State.

Practical ­Considerations ­Involving Settlements

Where the allegations in an accusation are rela­tively serious and particularly where they involve false advertising, some fraudulent pattern or scheme, or arise out of consumer complaints, there is always the possibility that disposing of the accusation will not be the end of the matter for the dealer. The filing of an accusation does not preclude the filing of a complaint by the consumer protection section of the office of the Attorney Gen­eral, District Attorney or City Attorney for civil penalties up to $5,000, or more, per violation. These offices can measure the number of violations by the number of people who have read, viewed, or heard an advertisement.

Before settling an accusation where this possibility exists, some discreet investigation should be con­ducted to determine if the complaints relating to the customers named in the accusation are also in the hands of the Attorney General, District Attorney or City Attorney. Sometimes this is not even necessary because the dealer will already have been contacted by one of these offices or it will be apparent that the DMV has forwarded a copy of its investigative re­port to one of these offices. The reverse is also true and at times the complaints originate with one of these offices and are forwarded from there to the DMV.

A dealer faced with the problem of defending against or settling both an accusation and an action for civil penalties has a number of practical consid­erations to weigh. Although it is beyond the scope of this chapter to discuss these in any detail, some of these considerations are as follows:

  1. If a dealer feels the cases cannot or should not be settled, or that it is too early to attempt a settle­ment, consideration should be given to telling the Attorney General, District Attorney or City Attorney that you are not in­terested in settlement in order to provoke the filing of a civil complaint at the earliest possible time, so long as it can be served upon you before the hearing on the accusation. Since discovery is ex­tremely limited in accusations, by having the civil complaint filed and served, your attorney will be in the position to take depositions in the civil case such as those of the DMV investigators or cus­tomers whose testimony the DMV intends to use, which depositions may be invaluable to your attorney in connection with the hearing on the ac­cusation.
  2. If an accusation has been filed and the Attorney General, District Attorney or City Attorney is aware of the case, but has made no indication of its intentions, it is sometimes possible, and it is at least worth the try, to attempt to settle the accu­sation on the condition no civil complaint will be filed. Although the DMV will never make an agreement abdicating its responsibility over li­cense discipline, sometimes the offices of the Attorney General, District Attorney or City Attorney will back off if they feel the dealer’s set­tlement with the DMV is adequate under the cir­cumstances to protect the consuming public.
  3. If it is apparent both cases are going to be prose­cuted and a settlement is indicated, with whom does the dealer first attempt to settle? One consid­eration is to settle with the agency which in your opinion views the case least seriously. A substan­tial settlement with the agency viewing the case most seriously might make the other agency re­evaluate its position. For example, if your attorn­ey feels the case can be settled with the DMV without an actual suspension and for a relatively nominal sum of money, and your attorney feels that he or she would recommend a substantially higher sum to settle the other agency’s complaint, settle the DMV case first. If you settle with the other agency for a substantial sum, the DMV might decide its case is worth at least an actual suspen­sion.
  4. After you have concluded a settlement with the agency which views the case least seri­ously, you are in a position to use that relatively modest settlement as a leverage to get the other agency to come down on its demands because it has obviously overvalued its case.
  5. It is often extremely helpful that the dealer and the dealership attorney meet in Sacramento with the Depart­ment’s attorney and the Chief of Compliance, or his or her Deputy, to discuss and conclude a settlement.

The following case reflects a court ruling that a dealer can be disciplined for license violations and also be subject to suit by other enforcement authorities:

The Bureau of Automotive Repair (“BAR”) filed an action against a repair shop owner alleging various violations of the Automotive Repair Act, including false representations that repair work had been done, failure to give written estimates, charging in excess of estimates, failure to document additional customer authorization for revised estimates, performing unnecessary work, and failure to record odometer readings on work orders. The hearing was held before an administrative law judge who issued a decision to place the repair shop on probation for three years, with the license suspended for fourteen days, and ordering payment of $4,600 in reimbursement for investigation costs. The repair shop owner’s license was also revoked, but the revocation was stayed for a three-year probation period, with the stay to become permanent if the probationary period was successfully completed without further violation.

Several months later the District Attorney for the county in which the repair shop did business filed a civil complaint against the repair shop alleging unfair competition and false advertising under the California Business and Professions Code. The District Attorney’s complaint basically alleged the same violations as were alleged in the administrative proceeding. The District Attorney sought monetary civil penalties against the repair shop.

The repair shop attempted to defend against the District Attorney’s action by claiming various legal defenses, including the defense that the repair shop was being subjected to “double jeopardy” violation of the Fifth Amendment of the United States Constitution which provides in part that no person shall “be subject for the same offense to be twice put in jeopardy of life or limb…” The Court of Appeal ruled against the repair shop holding that the double jeopardy argument did not apply, explaining that the purpose of an administrative proceeding was not to penalize the dealer, but rather to protect the public by license enforcement; whereas, the action under the Business and Professions Code was for civil damages as a penalty. The court thus ruled that since administrative actions do not involve punishment, they do not prohibit subsequent criminal or civil proceedings against the licensee.

This case illustrates the difficult decisions that licensees sometimes have to make when there is a license accusation. Sometimes an administrative license action is filed by the DMV, it gets settled, and that is the end of any further action. At other times, and following the license action, the Attorney General, District Attorney or City Attorney files an action against the licensee for civil penalties, or files a criminal action against the licensee. The Court of Appeal in this case emphasized that the administrative action decision against the repair shop did not constitute a penalty. Auto dealers, however, should take note of the fact that Vehicle Code section 11707 provides that with regard to a license accusation against an auto dealer, the dealer may settle the accusation with the DMV by paying monetary penalties which shall not exceed $1,000 for each violation. It thus appears possible that under the principles of this Court of Appeal case, there could be an argument of double jeopardy if there was a subsequent proceeding brought by other enforcement authorities for penalties or punishment, and if monetary penalties had been paid to the DMV under a settlement.

Small Claims Court and Collection of Judgment

Overview

The Small Claims Court is a legal forum which can have a significant impact on the activities of an automobile dealer. For instance, as a plaintiff, a dealer can use the Small Claims Court to economically pursue dealership claims on such matters as un­paid repair bills. Perhaps more importantly, a dealer as a defendant must be prepared to present a defense to a variety of claims which may be asserted arising out of dealership operations. A working knowledge of the practices and procedures of the Small Claims Court is therefore important to a dealer.

For the most part, these practices and procedures are simple and straightforward, as they are designed to make the Small Claims Court a forum where par­ties not represented by attorneys can economically and effectively pursue claims considered minor civil disputes. However, the designed simplicity of this forum does not always work, and a dealer must adopt a more sophisticated approach to obtain positive re­sults. This chapter highlights in­formation helpful in developing this sophistication by outlining the basic steps involved in the progression of a small claims action.

In addition to the exclusion of attorneys from rep­resenting parties at trial, key features of the Small Claims Court include a $5,000 (up to $10,000 for natural persons) jurisdictional limit on claims (subject to a limitation that only two claims per calendar year may be filed which ask for more than $2,500 in damages); a speedy trial; and a right of appeal for defendants only. The basic scenario of a small claims action begins with a plaintiff filing a claim with the court. Thereafter the court issues an order setting a hearing date which must be served upon the defendant along with the claim. At the hearing, both parties present their side of the case to the judge who renders a decision. This decision represents an enforceable judgment unless it is appealed by a defendant. If an appeal is made, the matter is then tried anew in the Superior Court where a final judgment is rendered.

Statutory guidelines for the Small Claims Court are set forth in the Small Claims Act. Additional sections of the Code of Civil Procedure are relevant to other aspects of a small claims action such as the service of papers, place of trial, and enforcement of the judgment. Procedures pertaining to small claims appeals are also addressed in the California Rules of Court.

CAUTION

Regarding Forms Referenced In This Chapter: The forms referred to in this chapter may be obtained from the filing window for Small Claims matters at each court location. The easiest source of the forms is the California Courts’ website at www.courts.ca.gov under the Small Claims section. This section is very helpful in terms of explaining the procedures of filing a claim in Small Claims Court. It includes step-by-step directions as to those procedures from start to finish. Additionally, the section includes small claims forms that may be completed online. Dealers should be aware of this valuable resource relating to handling such claims. Note that a dealer should always check with the clerk of the Small Claims Court where dealer’s action is pending to verify the current forms and procedures that are utilized in that particular court.

Commencement of a Small Claims Action

Jurisdiction

Before even considering the use of the Small Claims Court, a dealer should be aware that this court has a jurisdictional limit of $5,000 ($10,000 for natural persons), subject to a very important restriction that no party may file more than two small claims actions in any one calendar year where the amount demanded ex­ceeds $2,500. This limit simply means that a party not a natural person (for example, a corporation) can file two actions a year in this court which claim amounts in excess of $2,500 and an unlimited number of other actions which claim amounts less than $2,500.

Because of the $5,000 limit, a dealer who has been sued in a small claims action can bring a claim against the plaintiff for an amount up to $5,000 in the same action by way of a counterclaim.

The Small Claims Court does have authority to is­sue a conditional judgment as well as to provide equitable relief to a party in the form of rescission, restitution, reformation and specific performance in the place of or as a supplement to money damages. In such instances, the Small Claims Court retains jurisdiction until full payment and performance of any judgment or order. The Small Claims Court is authorized to provide injunctive relief only if there is a specific statute which expressly provides a Small Claims Court with authority to provide such equitable relief.

NOTE

Regarding Guarantors: A Small Claims Court can only consider claims which do not exceed $2,500 against a defendant guarantor that does not charge a fee for its guarantor or surety services. If the guarantor charges a fee for its services and the claim is made by a natural person, the Small Claims Court has a limit of $6,500 for such claims. Small Claims Court claims brought by an entity other than a natural person against a guarantor that charges a fee or the Registrar of the Contractors’ State License Board may not exceed $4,000.

CAUTION

Regarding Splitting Claims: A party may not split its claim arising from a single action and file two or more small claims actions. For example, a dealer plaintiff having a $10,000 claim against a defendant arising from a single transaction cannot file two separate $5,000 claims.

PRACTICAL TIP

A dealer plaintiff may waive the recovery of any amount on a claim in excess of $5,000, or $2,500 if applicable, to keep the matter in the Small Claims Court. This strategy should be strongly considered by a dealer when a claim amount is only slightly in excess of the jurisdictional limit since the dealer can then take advantage of the desirable features of the Small Claims Court. For example by making such a waiver, a dealer can avoid in­curring the attorneys’ fees normally connected with pursuing an action in a court of higher ju­risdiction (a corporation can only ap­pear in such courts represented by counsel). Ad­ditionally, a Small Claims Court will schedule a trial date much faster than courts of higher jurisdiction. Such a waiver actually becomes op­erative when a judgment is rendered.

NOTE

On Dishonored Checks: The Small Claims Court can be useful to a dealer pursuing claims aris­ing from dishonored checks. If the dealership receives a bad check which is not made good within 30 days after written demand is made upon the maker of the check, treble dam­ages of not less than $100 and not more than $1,500 may be recoverable, in addition to re­covering the amount of the check and the costs of mailing the written demand (subject to the jurisdic­tional limit of the Small Claims Court). To be able to recover the additional damages, the written demand must be sent certified mail and refer to the statute, the amount of the check and any bad check fee charged by the financial institution involved. The additional damages are not recoverable if the person stops payment in order to resolve a “good faith dispute.” While the applicable statute does not define what is meant by “costs” of mailing the written demand, if a dealer has paid an attorney for writing the demand letter, it would appear that the fee charged to the dealer should be recoverable under this section. See the chapter in this Dealership Operations Guide entitled “Other Important Topics” for a full discussion regarding dishonored checks and the form of the demand letter to be used.

Filing a Claim

The procedure for initiating an action in the Small Claims Court is for a party (the “plaintiff”) to file a claim under oath either by mail or in person with the court clerk. Some Small Claim Courts may allow such claims to be filed by facsimile transmission or electronic means. Generally, the contents of the claim form are the name and address (if known) of the de­fendant (note there can be more than one defendant); the amount and basis of the claim; that the plaintiff has demanded payment (where possible); that the de­fendant has refused the demand of the plaintiff to pay the monies or to return the property claimed; and the plaintiff understands the judgment on the claim will be conclusive and without a right of appeal.

If the amount of the claim exceeds $2,500, the plaintiff must sign a declaration (part of the claim form) stating under penalty of perjury that the plain­tiff has not filed more than two small claims action anywhere in California during the calendar year in which the amount demanded is more than $2,500. If the plaintiff is doing business under a fictitious business name, the plaintiff must sign a fictitious business name declaration under penalty of perjury to be filed with the claim affirming compliance by the plaintiff with the fictitious busi­ness name laws which require the executing, filing, and publishing a fictitious business name statement. The declaration form requires the statement number and the expiration date of the fictitious name state­ment.

An action filed by a plaintiff who has not duly filed a fictitious name statement is subject to being dismissed without prejudice to the plaintiff’s refiling of the complaint upon complying with the fictitious business name laws.

A corporate name in itself is not a fictitious name. For example, a corporation incorporated as “ABC Motors” can conduct business under that name without complying with the fictitious business name statutes. If that corporation uses any other name however, it must comply with those statutes.

When a claim is being submitted in Small Claims Court on behalf of a corporation, it should be signed by an officer of the corporation.

NOTE

Regarding Actions to Enforce a Debt:  If a party brings an action to enforce the payment of a debt, the claim should include a statement of calculation of liability which separately states the original debt amount, each payment credited to the debt, each fee and charge added to the debt, each payment credited against those fees and charges, all other debits and charges to the account, and an explanation of the nature of those fees, charges, debits, and all other credits to the debt, by source and amount.

Filing Fee

At the time a claim is filed, the plaintiff is required to  file a declaration stating the number of claims filed by the plaintiff in the last 12 months and to pay a minimal fee which may vary depending on the amount of the claim. If the plaintiff has filed more than 12 small claims actions within the last year, the filing fee is increased. It should be noted that the increased amount of the filing fee may not be recovered by the plaintiff as a cost.

PRACTICAL TIP

In connection with filing a claim, a plaintiff should review the information sheet form available from the Small Claims Court which sets out some of the basic ground rules followed by that court. This in­formation sheet can an­swer many simple questions regarding the Small Claims Court process. Additionally, as mentioned previously the Small Claims section of the California Court’s website at www.courts.ca.gov is designed to assist Small Claims Court liti­gants regarding court practices and procedures. Fi­nally, while a party cannot be represented by counsel for purposes of a small claims trial, the party may consult an attorney regarding any phase of a small claims action, including court practices and procedures.

CAUTION

Regarding No Assignment Of Claims: Only the original owner of a claim may pursue it in a small claims action. For example, a dealer hav­ing a claim for an unpaid repair bill can­not assign it to another individual or en­tity if it is to be pursued in the Small Claims Court. Note however, this prohibi­tion does not apply to bankruptcy trus­tees or holders of certain contracts (for instance retail installment contracts sub­ject to the Automobile Sales Finance Act) purchased for the holder’s portfolio.

Naming Defendants

A crucial concern of the plaintiff in filing a small claims action should be to properly identify and name any defendant against whom the claim is being filed. This is key because if the defendant is not named correctly, the plaintiff may be precluded from recovering on a judgment since it can only be enforced against assets held by the party named in the judgment. Proper identification of a defendant, including an address, is also important for venue (meaning the action is filed in the proper Small Claims Court location) and service of the claim purposes which are matters discussed later in this chapter.

Individual or Entity

The status of a party to be named as a defendant in a small claims action is what determines how that party is named. If a party is an individual, the indi­vidual’s name should be correctly spelled out along with any other names that might be used (for exam­ple John Jones, an individual, a.k.a. John W. Jones). If the defendant is an individual who is the sole owner of a business, he or she should be named both individually and with reference to his or her business (for example John Jones, individually and dba Jones’ Garden Shop). If the defendant is a partnership, the partnership should be named as well as the individual partners and any other name under which the partnership may be doing business (for example Jones Enterprises, a partnership, dba Jones’ Garden Shop; John Jones, a partner, indi­vidually; Jane Jones, a partner, individually). If the defendant is a corporation, it should be identified by its corporate name as well as any other name under which it may be doing business (for example Jones Enter­prises, Inc., a California corporation, dba Jones’ Garden Shop).

PRACTICAL TIP

There are certain sources available to the public which can provide information useful in correctly naming small claims defendants. Such sources include the California Secretary of State’s Office in Sacramento, county clerk’s offices and city halls. These sources can be used as follows:

  1. The Secretary of State’s Office (Corporate Status Department) in Sacramento can be a source to find out the correct name of a California corpora­tion; its date of incorporation; whether it’s in good standing; a statement number; and the names and addresses of the officers of the corporation and its agent for service. Some of this information is available from the California Secretary of State’s website, www.sos.ca.gov. Additional information may be available by telephone or by written request to the Secretary of State’s office in Sacramento for a nominal fee.
  2. County clerk’s offices have indexes which disclose the names and addresses of persons or entities using fictitious business names within a county. These indexes can be viewed in person or a writ­ten request by mail can be made for a copy of a particular fictitious name statement (there is a nominal fee for such requests).
  3. Many city halls have indexes which disclose the names and addresses of persons or entities having business licenses to conduct business under a particular name at an address within a city. A written request (with a postage-paid return enve­lope) indicating the business name and address may be a method which will obtain this information (there may be a nominal fee).

If a defendant corporation is not in good standing with the California Secretary of State’s office (i.e., having not paid its franchise tax), that corporation cannot legally defend or prosecute an action. A dealer can obtain a certified statement from the Secretary of State’s office showing an opposing corporation’s lack of good standing and present it to the Small Claims Court to secure a favorable judgment.

Doe Defendants

If the name of a defendant cannot be determined, it is possible to name that individual or entity as a Doe defendant (for example Doe 1). In this ­situation, as long as proper service is accomplished (discussed later in this chapter), the matter may proceed to trial, at which point the true name of the defendant can be ascertained.

In the instance where a claim has been filed against a party operating a business under a ficti­tious name, the plaintiff should ask the Small Claims Court judge to inquire at the trial as to the true name of the individual or entity conducting the business. If it is determined that the name used by the defendant is different from that used in the plaintiff’s claim, the plaintiff should confirm that the court does amend the claim to reflect the correct name. After a judg­ment is rendered, a plaintiff by motion and for good cause (meaning circumstances justifying the request) may have the judgment amended to reflect the correct legal name of a defendant.

PRACTICAL TIP

When filing a small claims action, a dealer should name all parties potentially responsible for the claimed damages under any name that they are thought to be using. This practice gives the dealer the best chance of successfully obtaining and satisfying a small claims judgment.

CAUTION

Regarding Claims Against Public Entities: To file a small claims action against a public entity, a plaintiff must first comply (and do so promptly) with certain claim procedures under the Government Claims Act. Information concerning these procedures can be obtained from the public entity, but a plaintiff may wish to contact an attorney since an action may be barred entirely if the procedures are not complied with properly.

Bankruptcy filing by defendant: Just as in other state court actions, a bankruptcy filing by a defen­dant acts to effectively bar the filing or further pur­suit of a small claims action by the plaintiff. Upon receiving notice of a bank­ruptcy filing, a dealer should discontinue further ef­forts regarding the action to avoid violating the automatic stay created by the filing. If questions as to the validity of the bankruptcy filing arise, a dealer should contact an attorney.

Filing a Claim in the Proper Court

Meaning of Venue

To avoid an unnecessary delay, a dealer filing a small claims action should make sure that it is being filed in the proper location of the Small Claims Court (typically, each Superior Court for a county has designated branch courts that handle small claims actions). This determination requires checking the local court rules which may identify the proper court location and also confirming that the action has proper “venue” (basically meaning it is filed in the appropriate county).

Determining Venue

The venue for a small claims ac­tion is determined in the same manner applicable to other civil lawsuits. The ground rules for venue under California law are stated in the Code of Civil Procedure. Some consumer laws, such as the Automobile Sales Finance Act contain a separate venue statute. Generally, proper venue exists when an action is filed in the county where at least one de­fendant resides or a corporate defendant does busi­ness, regardless of the nature of the claim. Proper venue in actions concerning injury to person or damage to personal property also exists if the injuries or damage oc­curred within the county where the action is filed. Venue in contract actions may be proper in the county where the con­tract was signed by a defendant, the county where a defendant resided when the contract was signed, or in the county where the contract is to be performed.

PRACTICAL TIP

A dealer having questions about where to file a Small Claims Court action should check with a court clerk or contact an attorney. The Small Claims section of the www.courts.ca.gov website also has good information on this topic under the heading “Find the Right Court to File Your Claim.”

Challenging Venue or Court Location.

Venue requirements are designed to protect a party from being subjected to unduly burdensome travel in defending a claim. A defendant who is being sued in the wrong Small Claims Court may challenge the venue or court location by writing to the court and mailing a copy of the challenge to each of the parties. If this procedure is followed, a defendant is not required to appear at the Small Claims Court trial (a dealer should elect not to appear only if it is confirmed the court has received the written challenge). If venue or the court location is challenged and all of the parties are not present, the court will postpone the hearing for at least 15 days and notify all parties by mail of the new hearing date, time and place. In the event of a challenge where all parties are present and the court determines the venue and court location are proper, the action may be heard. In all cases, the court is required to inquire into the facts sufficient to determine whether the venue and court location are proper and proceed accordingly. If the court determines the action was not commenced in a proper venue and location, it may on its own motion dismiss the action without prejudice or transfer it to the proper location, unless all defendants are present and agree the action may be heard.

Statute of Limitations

The statute of limitations is the period of time within which a plaintiff must file a legal action to preserve the claim being asserted. If a legal action is not filed with a court within the period of the applicable statute of limita­tions, the plaintiff is barred from pursuing the action. In fact, a defendant in a small claims action may raise the statute of limitations as an absolute defense. The more common statutes of limitations which a dealer may find relevant are:

  1. Breach of written contract: 4 years from date of breach. Note that to be enforceable, a contract for the sale of goods for a price of $500 or more should be reflected in a writing signed by the party against whom it is to be en­forceable.
  2. Breach of oral contract: 2 years from date of breach.
  3. Injury to person: 2 years from the date of injury.
  4. Damage to property: 3 years from the date of damage.
  5. Fraud: 3 years from the date of the fraud or the date it was ­discovered.
  6. Account stated/book account: When an account is rendered and agreed to or not objected to within a reasonable time (the “acknowledgment” does not have to be in writing), a 4 year statute of limitations can apply and will run from the date of the last item. This 4 year statute of limitations also applies to a “book account,” basically defined as a detailed statement of regular entries kept in permanent book-type form which constitutes the principal record of transactions between a debtor and creditor.

CAUTION

Regarding Avoiding Bar Of Claim Because Of Statute Of Limitations: A dealer should act promptly to bring an action in Small Claims Court to avoid any statute of limi­tations problem. If a dealer has a statute of limitations question, especially regarding the requirements for an ac­count stated or book account, the dealer should consult an attorney.

Setting an Action for Trial

Timing of Hearing

Once a plaintiff files a claim, the Small Claims Court clerk will issue an order directing all parties, including the defen­dant, to appear at a scheduled hearing date with witnesses and documents to prove any relevant claim or defense. Alterna­tively, the clerk may mail a copy of the claim to the defendant providing for a return receipt requested. Upon receiving proof the defendant did receive the claim, the clerk will issue an order scheduling the trial which is sent to all parties by return receipt mail. The hearing date will be set between 20 and 70 days from the date the order is issued.

Service of an ­Action on the Defendant

Service by Mail

Once a small claims action is initiated by the plaintiff’s filing of a claim and the court’s issuance of an order setting the hearing, the next step is to cause the delivery (called “service”) of those documents to the named defendant. This can be accomplished by several methods. The simplest and most economi­cal method is to have the Small Claims Court clerk serve a defendant with a copy of the claim and order by re­turn receipt mail. The fee for this type of service is minimal.

NOTE

Regarding Out Of State Service: Service of documents in a small claims action is considered valid only if it is made within the State of California, with two exceptions.

Personal Service

Individual Defendant

The other methods for accomplishing service of the order and claim upon a defendant in a small claims action are those available in con­nection with any state court lawsuit. These methods tend to be more involved and as a result are more expensive. For instance, the claim and order documents may be personally served upon a defendant. This personal service may be ac­complished by a Sheriff or Marshal of the county where a defendant resides, or by any individual who is over 18 years of age and is not a party to the small claims action. A plaintiff utilizing this method of service should make sure that the individual actually making the service pre­pares a declaration of personal service which states under oath the facts of service (i.e., date and  time when, and place where the documents were given to the defendant). This declaration form should then be filed with the Small Claims Court at least 5 days before the trial date.

Corporate Defendant

Where the small claims defendant is a corporation, joint stock company or association, or a corporate association or public entity, there are specific indi­viduals who need to be served to accomplish a valid personal service. For instance, with a corporation, service is valid if the documents are delivered to the agent for service whose identity must be on file with the Secretary of State’s Office. Service is also valid on the president, chief executive officer, or other head of the corporation, a vice president, secretary or assis­tant secretary, a treasurer or assistant treasurer, a controller or chief financial officer, a general manager, or a person authorized by the cor­poration to receive service of process; or in the case of a bank, the cashier or assistant cashier.

PRACTICAL TIP

Information as to the identity of a corporation’s officers and agent for service can be obtained by contacting the California Secretary of State’s Of­fice in Sacramento as discussed earlier in this chapter.

Partnership Defendant

Regarding a general partnership, personal service upon one of the general partners on behalf of the partner­ship is effective for purposes of obtaining a judg­ment against the partnership. Note that the partners of a general partnership should also be served as in­dividuals.

Minor Defendant

Where the defendant being served is a minor, per­sonal service of a small claims action may be ac­complished upon the parent, guardian, conservator, or other similar fiduciary or person in charge of that individual.

Substituted Service

A defendant in a small claims action can be served by a method designated as “substituted service”. This method of service is accomplished by leaving a copy of the claim and order at a defendant’s place of busi­ness during usual office hours with a person who is apparently in charge. This method of service may also be accomplished after several unsuccessful attempts of personal service at a residence, by leaving a copy of the documents at the defendant’s residence with a com­petent member of the household who is 18 years or older and who is informed of the contents of the documents served. To complete a substituted service, copies of the claim and order must be mailed to the defen­dant at either the business or residential address where the documents were left. The date this method of service is deemed completed is 10 days following the mailing of the claim and order. This substituted service approach can also be used at the defendant’s usual mailing address (for example, a private mail box) other than a United States Postal Service post office box.

CAUTION

Regarding Action Against Principal And Surety: When a small claims action in­volves a claim against a principal and a guarantor or surety pursuant to a guar­anty or suretyship agreement, the plaintiff must make a reasonable attempt to com­plete service on the principal. If that service is not accomplished, the action is to be transferred to the court of appropri­ate jurisdiction. If a dealer pursuing a small claims action encounters this or other unique service problems, the dealer should consult an attorney.

Timing of Service

The timing of the service of the claim and order on a defendant in a small claims action is important with respect to the scheduled hearing date. If the service of these documents is made in person or by return receipt requested mail, it must be completed at least 15 days prior to the scheduled hearing date when the defendant is a resident of the county where the action is brought, or at least 20 days prior to the scheduled hearing date when the defendant is a resident outside the county. Personal service of the papers is deemed completed on the day the defendant receives the claim and order and the return receipt requested method of service is deemed completed the day the defendant signs the mail return receipt. If the plaintiff cannot accom­plish service of the documents within this time frame, the small claims trial will be continued for at least 15 days, unless the defendant appears at the hearing and does not request a postponement. Should the defendant not appear, the court is required to send a notice by first class mail to all parties reflect­ing the new hearing date, time, and place. Documentary proof (a proof of service form) that a defendant has been served with the claim and order must be filed with the Small Claims Court at least 5 days before the hearing.

PRACTICAL TIP

Special attention should be paid to information as to a defendant’s physical description and where­abouts since this information can be impor­tant in accomplishing the proper service of the claim and order on that person. Service of these documents is es­sential for a plaintiff to secure a small claims judgment.

Defendant’s Role in a Small Claims Action

Response to Plaintiff’s Claim

As a defendant in a small claims action, a dealer must affirmatively act to contest the plaintiff’s claim or risk an unfavorable judgment. While a defendant is not required to file any kind of written answer to the plaintiff’s claim, the defendant should be prepared to present all defenses to the claim at the time of the small claims trial. As discussed in this chapter, a defendant may also consider certain procedural options for responding to a plaintiff’s claim which include requesting: (1) a continuance; (2) the transfer of the matter to a court of higher jurisdiction; or (3) the transfer of the matter to the proper court or dismissal without prejudice (because of improper venue).

Counterclaim

A defendant in a small claims action not only has the right to present a defense, but also has a right to file a claim (sometimes called a cross-claim or counterclaim) against the plaintiff utilizing a form available from the Small Claims Court. This counterclaim does not have to relate to the same subject or event as the plaintiff’s claim. In fact, the amount of this counterclaim can determine whether or not the matter remains within the jurisdiction of the Small Claims Court. If the amount of the counterclaim is below the jurisdictional limit ($5,000 for a party not a natural person and $10,000 for a natural person), the action will proceed in the Small Claims Court on the trial date scheduled, assuming this counterclaim is served upon the plaintiff at least 5 days prior to the hearing date. The deadline for service of the counterclaim changes if the plaintiff’s claim was served on the de­fendant 10 days or less prior to the scheduled hear­ing date. In that situation, the defendant’s counterclaim is timely served if it is served upon the plain­tiff at least 1 day prior to the hearing. To serve the counterclaim, a defen­dant may use the same methods available to the plaintiff to serve a claim as discussed previously in this chapter.

PRACTICAL TIP

In Small Claims Court, it is not compulsory for a dealer to file a counterclaim against the plaintiff on any related causes of action (i.e., claims arising from the same trans­action or dispute.) This means that a dealer can technically file a separate action later relating to matters raised in the plaintiff’s claim. However, it is recommended that if a dealer has grounds for a counterclaim, it be filed. This is especially important if it is below the applicable $5,000 jurisdictional amount since this will act to strengthen a dealer’s position with respect to opposing the plaintiff’s claim.

Transfer to Higher Court

Request for Transfer

In the event a defendant’s counterclaim against the plain­tiff relates to the same subject or event as the plaintiff’s claim and is in excess of the applicable jurisdictional limit (generally $10,000 for natural persons, $5,000 for non-natural persons), the defendant may commence an action against the plaintiff in a court of competent jurisdiction and then request a transfer of the small claim action to that court by filing with the Small Claims Court (where the plaintiff’s action is pending) a declaration reflecting the filing of the complaint, (a copy of the complaint should be attached). The filing of this declaration should take place at, or before, the time of the hearing on the small claims action and a copy of the declaration should be personally delivered to the plaintiff within that same time frame.

Court’s Discretion

In considering a request to transfer filed by a defen­dant, the Small Claims Court has the discretion to: (1) render judgment on the small claims case prior to the transfer; (2) not render judgment and transfer the small claims case; or (3) refuse to transfer the small claims case on the basis that the ends of justice would not be served. If a transfer of the matter is or­dered, the plaintiff is not required to pay any transfer fees, but must pay any filing fee required of a party to appear in the transferee court.

More than likely, if a Small Claims Court judge determines that the defendant’s claim is related to the transaction or dispute giving rise to the plaintiff’s claim, the action will be transferred to the higher court without deciding the merits of the plaintiff’s claim. However, if the claims are totally unrelated, the court may proceed to hear the plaintiff’s claim and a defendant should be prepared to present a defense at that time.

PRACTICAL TIP

A dealer who has a claim against the plaintiff in a small claims action may have the ability to re­move the entire matter from consideration by the Small Claims Court. Such an option can be strategically signifi­cant and a dealer should consult an attorney to discuss the relevant issues.

Conduct of a Small Claims Trial

Representation of the Parties

Just as in other legal proceedings, the preliminary aspects of a small claims action are designed to re­sult in a hearing where the plaintiff may present the evidence supporting the claim being asserted and the defendant, having had proper notice of the hearing, may present evidence supporting any defense to the claim. It is a basic premise of the Small Claims Court that the parties represent them­selves in the presentation of their cases at the time of trial, as no attorneys are allowed to participate in that presentation. Where a party is a corporation, it may be rep­resented by any employee and/or officer or director who has not been employed or retained solely for the purposes of appearing on behalf of the corporation at the hearing.

A person representing a corporation must be prepared to sign and file a declaration under penalty of perjury stating that he or she is authorized to represent the corporation and the basis for such authorization, and that the individual is not employed to represent the corporation in Small Claims Court.

PRACTICAL TIP

Although attorneys may not represent parties at the trial of a small claims action, they may be consulted in connection with other aspects of a small claims proceeding, including such things as using subpoenas, developing legal arguments, and preparing written legal authorities for use at trial.

NOTE

Regarding Expert Witnesses: A party involved in a small claims hearing can re­ceive assistance from a representative of an in­surer or other expert, although this assistance may not be given while the actual hearing is being conducted. Experts can also testify on behalf of a party regarding facts they have personal knowledge of and about which they are competent to tes­tify.

Pre-Trial ­Preparation

In preparing a presentation for a small claims trial, a dealer should concentrate on presenting testi­mony and documents in a chronological and straight­forward manner which establishes the facts supporting the dealer’s position. Written records of all descriptions, in­cluding lists of damages and photographs, may be used to increase the effectiveness of a presentation. Subpoenas may be used to require an opposing party or a non-party witness to produce relevant records or other physical evidence (for example, car parts or even a car) at the time of trial. However, formal pre-trial discovery procedures such as interrogato­ries and request for admissions may not be used for purposes of preparing for a small claims trial or a hearing on a small claims appeal.

PRACTICAL TIP

In addition to bringing the originals of support­ing documents to court at a small claims trial, a dealer should bring extra copies. These copies may often be submitted to the court for consideration, allowing the dealer to retain the originals.

Personal Appearance by Parties

An individual who is a plaintiff or defendant in a small claims action should always personally appear on his or her own behalf at the trial unless certain special circumstances exist which authorize another individ­ual to appear or a written declaration to be submitted in lieu of any appear­ance. These special circumstances include:

  1. If the party is an individual doing business as a sole proprietorship, and the claim involved may be proven or defended against by evidence which consists of business records made in the regular course of business and made at or near the time of the act, condition or event involved and there is no other issue of fact in the case, another person can appear on behalf of the individual.

    That person must be a custodian or other qualified witness who can authenticate the records by testifying to the identity of the records and the mode of their preparation and this testimony must show a method of preparation which indicates the trust­worthiness of the records.

    Also, that person must be a regular employee who has not been employed solely for the purpose of representing the individual in Small Claims Court.

  2. A plaintiff who is an individual may have another individual appear or may submit declarations to serve as evidence sup­porting his or her claim if the plaintiff is serving on ac­tive duty in the United States Armed Forces out­side the state and was assigned to this duty station after the claim arose and the assign­ment is for more than 6 months. Any individual appearing on behalf of such a plaintiff must serve with­out compensation and must not have appeared in small claims actions on behalf of others more than four times during the calendar year.
  3. If a party is an individual incarcerated in a county jail, a Department of Corrections and Rehabilitation facility, or Division of Juvenile Facilities facility, he or she may then have another individual appear or submit a declaration to serve as evidence. Any individual appearing on behalf of an incarcerated party must serve with­out compensation and must not have appeared in small claims actions on behalf of others more than four times during the calendar year.
  4. If a defendant is a non-resident of California, but owns real property in the state, he or she is not re­quired to personally appear and may submit writ­ten declarations to support his or her defense and/or have another individual appear. Any individual appearing on behalf of a non-resident party must serve without compensation and must not have appeared in small claims actions on be­half of others for more than four times during the calendar year.
  5. If a party owns rental real property, the party may have a property agent under contract to manage the rental of that property appear on the party’s behalf in a small claims action if the claim relates to the rental property. This property agent may not be an individual retained principally to represent the property owner in small claims court.
  6. A husband or wife may appear on behalf of his or her spouse if a joint claim is involved under the following circumstances: (1) the represented spouse gives his or her consent; and (2) the Small Claims Court determines that the interests of justice would be served.
  7. If a party cannot properly present his or her claim or defense, the Small Claims Court may in its discretion allow another individual to assist that party.

NOTE

Regarding Authorizing Others To Appear: In those situations where a party to a small claims action intends that another individual appear on that party’s behalf as discussed in items 1 through 5 above, a Small Claims Court will require the filing of a written declaration stating that such an individual is authorized to appear for the party and the basis for the authorization. In those situations discussed in items 1 and 5 above, the declaration will also need to state that the individual is not employed solely to represent the party in Small Claims Court. In the situations discussed in items 2, 3 and 4 above, the declaration will need to state that the individual is serving without compensation and has appeared in Small Claims Court on behalf of others no more than four times during the calendar year.

Pre-Trial ­Procedure

A party in a small claims action should appear at the time and courthouse where the matter is sched­uled to be heard. At the scheduled place, a list of cases set to be heard that particular day is usually posted which should be checked to verify that the relevant case is listed. Once the matter is called by the judge, the parties will be sworn in and the court will normally entertain any motions or statements by the parties pertaining to procedural matters (i.e. improper service; requests for continu­ance; jurisdictional prob­lems; etc.), before proceed­ing to hear the merits of the action.

NOTE

Regarding Postponements: Any party may submit a written request to a Small Claims Court for postponement of a hearing date for good cause (either by letter or a form available from the Small Claims Court). Such a request must be filed at least 10 days before the hearing date, unless the court determines that the requesting party has good cause for the request being filed later. There is a minimal fee that must be paid to file the request and the requesting party should mail or deliver a copy of the request to all other parties. If the court determines that the “interests of justice” would be served by postponement, the court will reschedule the hearing and notify all parties by mail of the new hearing date, time and place. This determination should occur quickly as a Small Claims Court is required to provide a prompt response by mail to any person making a written request for postponement of the hearing. The court also has the discretion to postpone a hearing under any circumstances it deems appropriate, but will almost always be inclined to continue a hearing to “permit and encourage” the parties to resolve the matter informally or by some other process.

PRACTICAL TIP

A dealer who wishes to postpone a Small Claims Court hearing date should submit a written request as soon as possible. If a written notice is not received from the court that confirms the granting of the continuation, the dealer should contact the court prior to the scheduled hearing date to determine the status of the postponement request. Unless it is actually determined that a continuance has been granted, the dealer or appropriate corporate representative, if applicable, should appear at the scheduled hearing date.

NOTE

Regarding Temporary Judges: If all parties agree, a small claims matter can be heard by a temporary judge who usually is an attorney empowered by the court to handle such matters.

Regarding Disqualifying A Judge: If a dealer be­lieves that a particular Small Claims Court judge will not be fair in hearing a small claims action, the dealer may disqualify that judge by following certain procedures. In general, a dealer may file an affidavit for disqualification which in effect contains a statement under oath by the dealer that the judge in question is prejudiced and that the dealer cannot receive a fair and impartial hearing. No specific reason for the prejudice must be stated in the affidavit. Form affidavits to disqualify a judge may be available from the County Clerk’s office where the matter is being heard.

Dealers should be aware that they must act in a timely manner to disqualify a judge. Spe­cifically, if the identity of a judge is known at least 10 days before the hearing, the affi­davit required to disqualify the judge must be filed 5 days before the hearing. If the identity of the judge is learned only at the time of hearing, the disqualification affidavit may be filed at the time of hearing. Dealers should carefully consider the ramifications of disqualifying a judge, because it can create significant delays as to when a small claims action will actually be heard and any new judge assigned to hear the matter may not be sympathetic toward the party causing the additional delay.

Trial

The actual trial of a small claims action is con­ducted informally with the goal being to dispense justice “promptly, fairly, and inexpensively.” Small Claims Court judges will not expect attorney-like presentations of the evidence and facts and as a result, they will usually be more active than judges in other forums in asking questions of the parties and witnesses as to the evidence presented.

Judges for instance may investigate by viewing evi­dence outside the court room or consulting witnesses and for the most part will consider any evidence, in­cluding hearsay, which a party presents. Normally, the plaintiff will present evidence first. Following this presentation, the defendant will then have the opportunity to present evidence. As a general rule, either side has a right to cross-examine any witnesses who testify for the other party. This simply means that once a witness has answered questions for one side, the other party has a right to ask any questions of that witness which might un­dermine or explain more favorably the testimony previously given.

Burden of Proof

It is important to realize that the plaintiff has the burden of establishing the facts which prove the claim being asserted. For example, a dealer pursuing a claim for an unpaid repair bill should establish by evidence and testimony that the defendant authorized the repairs involved; the repairs authorized were in fact per­formed; and that the defendant failed to pay the bill for those repairs. Once the dealer has presented evi­dence proving these facts, the defendant would then have the burden to present evidence as to why the repair bill should not be paid.

To a certain extent, Small Claims Courts have de­veloped a reputation for favoring the plaintiff’s posi­tion on disputed claims. This tendency will certainly vary in degree from court to court, but may be at least partially attributable to the fact that the plain­tiff has no right of ­appeal in a small claims action.

PRACTICAL TIP

A dealer’s small claims trial presentation should be as concise as possible, because as a practi­cal matter Small Claims Court judges have many matters to hear and so will attempt to expedite the hearings by assigning each one an in­formal time limit.

Evidentiary Concerns

A party should take into consideration certain ba­sic evidentiary principles to present the strongest case possible at a small claims trial. For instance, whenever possible, a party should present the follow­ing:

  1. Documentary evidence to support oral testimony of a fact;
  2. Testimony of record keeping practices and proce­dures to enhance the credibility of written records submitted;
  3. Testimony as to specific dates, times, and places to support testimony of factual occurrences; and
  4. Testimony of a non-party witness with no interest in the outcome of the action to support disputed facts.

Small Claims Judgments

Following the presentation of the evidence by both parties in a small claims action, the judge will either render a decision on the matter at that time or take it under submission (in taking the matter under sub­mission, the judge is simply delaying the decision to a later time, often in order to check legal authorities or review documentary evidence in greater detail). As part of this decision, the court should award court costs to the prevailing party. Examples of court costs are filing fees and fees for service of papers.

Notice of Judgment

Once the judge renders a decision, the Small Claims Court clerk is required to deliver or mail a Notice of Entry of Judgment to each of the parties in the action. This notice sets forth the date of judgment; title and case number of the action; the prevailing party; and terms of the judgment rendered. In addition, it normally indicates the date the judgment was entered, which commences the time running for the defendant to file an appeal, and gives in­formation on the respective rights of the parties.

A party should review this Notice of Entry of Judgment carefully to see that it is accurate and, in a case where an oral decision was rendered, to see that the written terms match that oral decision. If there is a discrepancy, the court clerk should be contacted immediately to correct the situation.

Default Judgment

In those instances where a party does not appear and does not have a defense presented at a small claims trial, the court may enter a default judgment against that party. If the plaintiff does not appear and does not have evidence put on supporting the claim, the court will on its own motion (or the defen­dant should request it) grant judgment in favor of the defendant on the plaintiff’s claim. Where a defendant does not appear, the plaintiff is entitled to a default judgment only when proper service of the claim and order were made on the defendant and the plaintiff presents evidence to prove the claim asserted.

NOTE

On Non-Military Declaration: A plaintiff may be required to file a declaration signed under penalty of perjury that the defendant is not a member of the military service of the United States to obtain a default judgment The reason for this declaration is that the Servicemembers Civil Relief Act gener­ally prohibits the entry of a default judgment against a member of the military.

Motion to Vacate Default Judgment

If a default judgment is entered against a defen­dant in a small claims action, the defendant can file a motion to vacate it (this means to remove the effect of the judgment). The Small Claims Court form for this motion must be filed within 30 days of the date the Notice of Entry of Judgment is mailed to the defendant. The defendant should then appear at the hearing on this motion (the date to be set by the Small Claims Court) to tell the court why the defendant was unable to appear at the prior small claims trial.

If the defendant cannot attend the hearing on the motion to vacate, the defendant can in the alter­native submit a “written justification for not appear­ing together with a declaration in support of the mo­tion.”

In any event, the defendant must appear in person or submit the above-referenced written explanation if the defendant is to have the right to appeal should the motion be denied. This right of appeal becomes available once the Small Claims Court denies the motion to vacate. To exer­cise that right of appeal, a defendant must file a notice of appeal within 10 days after the court has mailed or delivered notice of the motion to vacate being denied. Regarding such an appeal, the Superior Court will first consider the merits of the motion to vacate and only if the defendant prevails on that issue and all parties are present, will the court hear the merits of the actual dispute. Alternatively, the court may order the transfer of the matter back to the Small Claims Court for hearing.

If the defendant makes a showing of “good cause”, the Small Claims Court may grant the motion to vacate. “Good cause” is defined as “circumstances sufficient to justify the requested order or action, as deter­mined by the judge”, which basically means that a party has a very good excuse for not appearing at trial. The Small Claims Court has a great deal of discretion under this standard, so if there is a reasonable ex­cuse for why a defendant did not appear at the trial, the legal principle that a matter should be decided on its merits weighs in favor of the motion being granted.

If the motion to vacate is granted and all parties are present and agree, the court may hear the claim on its merits without rescheduling it.

NOTE

On Default Against Plaintiff: If a plaintiff fails to appear at the small claims trial and a de­fault judgment is entered, the plaintiff can file a motion to vacate that judgment and have the matter heard on its merits. This motion, which must be filed within 30 days of the mail­ing of the Notice of Entry of Judgment, will be granted upon a “showing of good cause.” A defendant can oppose such a motion by sub­mitting written opposition papers and/or ap­pearing in person to orally argue against the motion. If the motion is granted and all the pa­rties are present and agreeable, the hearing on the merits may be held.

Motion to Vacate when Improper Service

If a defendant has not been properly served with the plaintiff’s claim and the court’s order setting the hearing, the defendant may file a motion to have a default judgment va­cated. This motion should be granted on a showing of good cause. A de­fendant must bring a motion to vacate within 180 days after the defendant discovers or should have discovered that an unfavorable small claims judgment has been entered against the defendant. Pending the hearing on the motion to vacate, the Small Claims Court may order that enforce­ment of the judgment be suspended.

NOTE

Small Claims Court’s Power To Correct Or Vacate Judgment: A Small Claims Court judge has the authority to correct clerical mistakes or even judicial errors regarding a judgment under the appropriate circumstances.

Small Claims Appeal

Defendant’s ­Option Only

Once a judgment is rendered in a small claims ac­tion, the clerk is required to notify the parties by mail of the result. The issue of an appeal then becomes relevant. If a small claims judgment is in favor of the defen­dant, the plaintiff has no right of appeal and the judgment is final. However, if the defendant is successful on a counterclaim against the plaintiff, then the plaintiff will have the right to appeal as to that claim. Note that a defendant who is unsuccessful in prosecuting a counterclaim has no right of appeal regarding the judgment on the counterclaim.

If the small claims judgment is in favor of the plaintiff, the defendant has the right to appeal to the Superior Court of the county where the Small Claims Court is located. If the right of appeal is not properly exercised by the defendant, then the judgment is final. This right of appeal is therefore extremely important to a defendant, since it repre­sents the only way the defendant has a chance to change an unfa­vorable result.

NOTE

On Appeal Corporation May Appear Without Attorney: A corporation which is a party to a small claims action may appear in a Superior Court for pur­poses of an appeal through a director, offi­cer, or employee.

On plaintiff pursuing same claim in Superior Court: There is legal authority based upon the concept of “collateral estoppel”, that a plaintiff who is unsuccessful in pursuing a claim in a small claims action is barred from re-litigating that claim in a separate lawsuit brought in the Superior Court, if the record from the small claims action makes it sufficiently clear that the same claim is involved.

PRACTICAL TIP

Since a small claims appeal represents a pro­ceeding in the Superior Court, a party may be represented by an attorney both in connection with the filing of the appeal and the hearing of the appeal.

NOTE

On Appeal By Insurer Of Defendant: The insurer for a defendant may appeal a judgment on a plaintiff’s claim that exceeds $2,500, if the in­surer stipulates its policy covers the matter to which the judgment applies.

Procedure for Filing an Appeal

To appeal a small claims judgment, a defendant must file a Notice of Appeal form with the Small Claims Court within 30 days of the date the clerk delivers or mails the Notice of Entry of Judgment. At the time the Notice of Appeal is filed, the defendant must also pay a filing fee.

CAUTION

Regarding Appeal Deadline: If the Small Claims Court renders a decision and the clerk of the Small Claims Court fails to send the Notice of Entry of Judgment, the time for filing an appeal should not be considered as extended. A dealer’s best strategy under those circumstances is to make sure that the Notice of Appeal is filed within 30 days of the actual trial date. This approach eliminates any chance that there will be no appeal because of a late filing of a Notice of Appeal.

The time period for filing an appeal is not ex­tended by any request to correct a mistake in a judgment. However, if a notice of a modified judg­ment is delivered or mailed, a new period for filing an appeal commences.

In the situation where the de­fendant wants to ap­peal following a motion to vacate (where the court has denied the motion), the Notice of Appeal must be filed within 10 days after the Small Claims Court has mailed or delivered the notice of the denial of the motion.

PRACTICAL TIP

A Notice of Appeal form is available from the Small Claims Court and should be used for pur­poses of exercising the right of appeal. However, there is legal authority that any statement signed by the appealing party (referred to as the “Appellant”) or the party’s attorney indicating the appeal of a specified judgment or denial of a motion to vacate should suffice to exercise the right of ap­peal.

Notice to Other Parties

Following the filing of a Notice of Appeal, the Small Claims Court should send a notice of this fil­ing to the other parties in the action. The Small Claims Court should also cause the case file and all related papers to be transmitted to the appropriate branch of the Superior Court.

Setting Appeal Hearings

Upon receipt of this record on appeal, the Supe­rior Court will act to set a hearing on the matter for the earliest available date and then cause written no­tice of that hearing date to be sent to the parties at least 14 days before that date. Any party may seek to have this hear­ing date postponed for good cause. The continuance cannot be for more than 30 days unless the situation involves a case of extreme hardship.

NOTE

No Jury Trial: There is no right to a jury trial on a small claims appeal.

Conduct of an ­Appeal Hearing

The actual hearing on the appeal of a small claims action is conducted informally like the initial small claims trial, except that attorneys may participate. Again, the hear­ing itself basically consists of both sides presenting to a different judicial officer whatever evidence or testimony they have to support their respective positions. Hearsay evidence, such as written declarations from witnesses not present, can be presented at this hearing. However, Superior Court judges may tend to discount hearsay evidence unless there are convincing reasons why better evi­dence could not be presented.

CAUTION

Appeal Is New Trial: It is important to realize that this hearing represents a totally new trial of all of the claims of all parties and the Superior Court judge is not bound in any way by what happened at the Small Claims Court trial. This means that claims against other defendants who did not file an appeal and even the counterclaims of de­fendants will be given new consideration. It is therefore crucial that a dealer be prepared to again fully present at the appeal hearing the evidence supporting the dealer’s claim as well as the evidence needed to defend any claim made against the dealer.

NOTE

On Appeal As New Trial: Although a small claims appeal should be handled as a totally new trial, there is some legal authority (however more recently reported court decisions have declined to follow this authority) that a superior court judge is prohibited from granting an award of damages to an appellant appealing a judgment in favor of the small claims plaintiff.

PRACTICAL TIP

A dealer’s preparation for the presentation of the case at the hearing on appeal should take ad­vantage of any lessons to be learned from the previous small claims trial. Steps that can be taken to strengthen a presentation at the appeal hearing include subpoenaing further witnesses or documents and citing additional legal authorities which are applicable to the relevant issues. A dealer may also want to ask the court to return exhibits from the small claims trial which are in the court file so they can be used again in the ap­peal presentation. In any event, a party’s presen­tation at a hearing on appeal should be as clear and concise as possible because the congestion of the Superior Court will often dictate that only a small amount of time is available to hear a small claims appeal. If a dealer is the appellant and at the hearing on appeal the opposing party does not appear, the dealer should make sure the court finds in the dealer’s favor to remove the effect of the Small Claims Court judgment.

Dismissal of Appeal

If a small claims appellant for some reason (for example a voluntary settlement of the dispute) de­cides not to pursue a small claims ap­peal, the appellant can file a written request with the Superior Court to have it dismissed or a stipulation for dis­missal signed by the opposing party.

The Decision of The Superior Court on Appeal

The decision of the Superior Court on a small claims appeal is final and cannot be appealed. As part of that judgment, the Superior Court may “for good cause and where necessary to achieve substantial justice” award at­torney’s fees actually and reasonably incurred in connection with the appeal in an amount not to ex­ceed $150 dollars. Actual loss of earnings and expenses of transportation and lodging actually and reasonably incurred in connection with the appeal in an amount not to exceed $150 dol­lars may also be awarded.

NOTE

On Attorney’s Fee For Frivolous Appeals: If the Superior Court judge hearing the small claims appeal determines that a defendant (or a plain­tiff appealing a defendant’s counterclaim) filed it without substantial merit and for purposes of delay or harassment, the judge may award at­torneys’ fees of up to $1,000 to the prevailing party and also any actual loss of earnings and expenses of transportation and lodging reason­ably incurred in connection with the appeal in an amount up to $1,000. A party requesting loss of earnings and transportation and lodging expense should be ready to provide records supporting the requested amounts.

It should be pointed out that some authority exists indicating that the Superior Court does have the power to vacate its decision and order a rehearing where the court is convinced a mistake was made. However, this type of rehearing is very unlikely to occur and would probably only be possible if there had been a fraud on the court or the court had acted in excess of its jurisdictional powers. Also, it should be noted that procedural issues pertaining to small claims actions are subject to appellate court review by ex­traordinary writ.

Collecting on a Small Claims Judgment

Once a favorable judgment is obtained from the Small Claims Court and there is no appeal or it is affirmed on appeal by the Superior Court, the judgment becomes final. At that time, the pre­vailing plaintiff (designated as the “judgment credi­tor”) often faces a difficult challenge of collect­ing on the judgment from the defendant (designated as the “judgment debtor”). Although an unsuccessful defendant (or cross-defendant) is supposed to pay a judgment “immediately” or pursuant to any terms or conditions the court may order, this in reality will not always happen. In any event, a successful plaintiff should make a demand on the defendant for payment of the amount awarded before taking other steps to collect the judgment.

If the judgment is not paid voluntarily, certain le­gal procedures are available to a judgment creditor to collect the sums due. Among the most useful of these procedures are abstracts of judgment, judgment liens on business personal property, writs of execution, wage gar­nishment, and use of a keeper. These procedures, which vary in terms of appli­cation and complexity, are discussed briefly in this chapter to communicate a basic understanding of their approach and practicality in collecting a small claims judgment. Note that the costs incurred in employing these procedures are recoverable from the judgment debtor as a general rule.

PRACTICAL TIP

Judgment enforcement procedures discussed in this chapter are those which are available and commonly used to enforce any state court judgment. If questions arise re­garding their use, a dealer should consult an attorney.

Stay of Judgment

Under any circumstance, a small claims judgment cannot be enforced until the time for filing an appeal has expired, or if an appeal was filed, until it has been determined. This stay on the enforcement of a judgment occurs automatically and does not require the defendant to file a bond.

NOTE

Judgment On Vehicle Accident: To assist in the collection of small claims judgments which are in the amount of $1,000 or less and are against a driver of a motor vehicle involved in a motor vehicle accident, a judgment creditor, in those in­stances where the judgment remains unsatis­fied for more than 90 days, may file with the DMV a notice stating that the judgment has not been satisfied and requesting a judgment debtor’s vehicle driving privileges be suspended. There is a minimal fee re­quired for filing this notice, which can lead to a suspension of driving privileges for a period of 90 days. This suspension will be lifted if the judgment is paid and proof of payment is submitted to the DMV.

Obtaining ­Financial ­Information about the ­Judgment Debtor

To make the best use of the judgment enforcement procedures available, a judgment creditor needs to secure information as to the financial situation of the judgment debtor. The more a judgment creditor knows about the nature and location of a judgment debtor’s assets, including income sources, bank ac­counts, real property, and personal property, the more likely a small claims judgment will be successfully col­lected.

Prior Business ­Dealings

As a result of prior business dealings, a dealer may have ready access to financial information (for example, bank locations, bank account numbers, employer names and addresses, and residential/business property addresses) which is useful in collecting a small claims judgment from a former customer who is now the judgment debtor. If business records do not disclose specific information that is useful, they can reveal leads which, with minimal investigation, can develop more useful information. For example, the visual inspection of the home address of a judgment debtor followed up by a check of the county tax as­sessor’s records may lead to a determination that the prop­erty is a residence in which the judgment debtor has an ownership interest.

Court Questionnaire

An alternative source of financial information concerning a judgment debtor may be a procedure initiated by the Small Claims Court itself. At the time a judgment is rendered, or when Notice of Entry of Judgment is mailed, the Small Claims Court clerk should deliver or mail to the judgment debtor a form “containing questions regarding the nature and loca­tion of any assets of the judgment debtor.” The judg­ment debtor is required to complete the form and de­liver it to the judgment creditor within 30 days of the date the Notice of Entry of Judgment is mailed. If a motion to vacate or appeal was filed, the judgment debtor has 30 days to complete the form from the date the clerk mailed or delivered notice of denial of the motion to vacate or notice of dismissal of or entry of judgment on the appeal.

If a judgment debtor willfully fails to complete this form as required by statute, a judgment creditor theoretically can request the Small Claims Court for sanctions against that party. Upon such a request, the Small Claims Court is authorized to issue a warrant to have the judgment debtor brought before the court to answer for the failure to return the statement of assets form and to face possible punishment for contempt. Addi­tionally, the court may award attorney’s fees to the judgment creditor for efforts involved in requesting these sanctions.

PRACTICAL TIP

As a practical matter, the statement of assets questionnaire represents a voluntary effort on the part of the judgment debtor and thus is of limited value. Many times this form, even if it is returned, will contain incomplete or inaccurate information. Although statutory authority exists for the Small Claims Court to order sanctions against a judgment debtor who fails to return the question­naire, this will not necessarily happen.

Judgment Debtor’s Exam

A judgment creditor’s best chance to obtain finan­cial information about the judgment debtor utilizing the judicial process is to set up a judgment debtor’s exam. This procedure involves personal service (usually by a Marshal or Sheriff) of an order on the judg­ment debtor to ap­pear at a hearing where the judgment creditor is able to ask the judgment debtor (who is put under oath) questions regarding his or her assets.

If a dealer has a desire to pursue this procedure, the dealer should check with the court clerk and/or an attorney regarding the steps necessary to set up an exam.

A judgment debtor who fails to appear at a judg­ment debtor’s exam when properly served with the necessary order is subject to sanc­tions (see prior discussion of these sanctions in connection with the Court Questionnaire). Under such circumstances, a judgment creditor should be successful in having a bench warrant issued by the court against the judgment debtor.

Use of an ­Investigator

There are investigative services available at a cost ranging from $150-$500 (depending on the scope of the search) that may be able to provide a dealer with the location of a bank ac­count or other valuable assets of a judgment debtor. The costs of an in­vestigative service, however, will not be recoverable.

Collection ­Procedures

Abstract of Judgment (For Real Property)

If it is determined that a judgment debtor has or could possibly in the future possess an interest in real property, a judgment creditor should strongly consider es­tablishing a judgment lien against that property as a method of enforcing a small claims judgment.

How to Establish

This particular lien is established by completing an Abstract of Judgment form and then submitting it to the clerk of the court where the judgment was ren­dered along with a minimal fee. The form itself basically contains information as to the case number, court, title, date of entry of judg­ment, terms of the judgment, existence of any judg­ment stay (meaning any court order that the judg­ment cannot be collected now), and the names and addresses and other identifying information as to the judgment creditor and judgment debtor. The court then “issues” the Abstract of Judgment (which basically means that a clerk gives it a stamp of approval) and returns it to the judgment creditor who should take it or mail it (with the ap­propriate number of copies) to the county recorder’s office for the county within which the judgment debtor is believed to possess an interest in real prop­erty for recording. There is a nominal fee to record an Abstract of Judgment.

Effect

By recording an Abstract of Judgment, a judgment creditor creates a judgment lien against any and all real property interests presently held or even ac­quired later by the judgment debtor within that county. The practical effect of this lien is that the judgment debtor cannot transfer real property interests without the lien being satisfied. The effect of this lien, however, has some limitation as it does not necessarily force the immediate payment of the judgment or deny the judgment debtor of the present use of the property.

PRACTICAL TIP

Because this procedure is so simple and cost ef­fective, it is highly recommended that a dealer judgment creditor use an Abstract of Judgment to assist in the collection of a small claims judgment in any instance where the dealer believes the judgment debtor possesses an in­terest in real property. Although this judgment lien can be enforced by levy and sale pursuant to a Writ of Execution, this procedure is very complicated and therefore impractical.

NOTE

On Abstracts Of Judgment: An Abstract of Judgment is valid only in the county where it is recorded. Therefore, if a judgment debtor has, or may acquire, interests in real property lo­cated in more than one county, a judgment creditor should record an Abstract of Judgment in each of those counties to have the best chance to collect on the judgment.

Judgment Lien (For Business ­Personal Property)

If a dealer obtains a small claims judgment against a judgment debtor who is the owner of a business, the dealer can create a judgment lien against the personal property of that business in an effort to collect a small claims judgment. Such personal property is generally defined to be accounts receivable; chattel paper; equipment; farm products; inventory; and negotiable documents of title.

How to Establish

To establish this type of judgment lien against business personal property, a dealer needs to file a No­tice of Judgment Lien with the California Secretary of State’s office in Sacramento. This form (available online from the Secretary of State’s website) should be completed with the required information including the court title; case number; date of notice; date the judgment was entered; terms of the judgment; the names and addresses of the judgment debtor and judgment creditor; and a state­ment to the effect that the judgment lien is estab­lished as to all personal property to which a judg­ment lien may attach under the statutory authority. The completed form is then filed with the Secretary of State’s office together with a mini­mal filing fee. While the judgment creditor is re­quired to serve a copy of the Notice of Judgment Lien on the judgment debtor either in person or by mail, a failure to do so does not “affect the validity of the judgment lien.”

Effect

The effect of this lien in collecting a small claims judgment is similar to the Ab­stract of Judgment lien discussed previously, except as applied to business personal prop­erty. The lien does not necessarily cause payment of the judgment immediately or even deprive the judg­ment debtor of the use of the personal property in­volved. However, it does normally (there are excep­tions) prevent any bulk transfer of that property without the lien being satisfied.

Writ of Execution (For Personal or Real Property)

In contrast to the two types of liens discussed previously, a Writ of Execution is a more direct (and often more expensive) judgment enforcement procedure available to a dealer to enforce a small claims judgment. This procedure is applicable to both real and personal property and basically in­volves a Sheriff or Marshal levying upon a specific asset held by the judgment debtor which is not ex­empted by statute. An example of an exempted asset is the loan value of an unmatured life insurance pol­icy. Following such a levy, if the judgment remains unpaid, the as­set in question can be sold (or collected) by the levying ­officer in an attempt to satisfy the judgment (this assumes that certain statutory requirements are met regarding the sale).

CAUTION

Regarding Writs Of Execution: The use of a Writ of Execution is discussed in this chapter only in very basic terms. The ac­tual application of this procedure can be quite complicated even when trying to enforce a small claims judgment. A dealer should therefore not hesitate to con­tact an attorney regarding any ques­tions that may arise concerning this procedure.

How to Obtain a Writ

To obtain a Writ of Execution, a dealer must first complete a Writ of Execution form and then submit it (usually with 2 copies and a minimal fee) for is­suance to the clerk of the Small Claims Court. Some courts require a separate application form to be submitted with the Writ of Execution form as part of the process. The Writ of Execution form requests a variety of information concerning the lawsuit and the parties involved.

Specific instructions as to how to fill out such a form are set forth in the example below, but for purposes of a small claims judgment, the main idea is to indicate accurately on the form the amount of the judgment awarded which is still unpaid. Other calculations as to post-judgment costs and interest to which a judgment creditor may be entitled should not be a major concern.

Instructions for Writ of Execution Form

Instructions for completing a Writ of Execution form are provided below based upon a hypothetical fact situation where “Quality Dealer, Inc.” seeks to enforce a judgment rendered by a Small Claims Court against “John Jones.” The judgment, which is in the amount of $1,000 ($980 in principal and $20 in costs), was entered on June 1, 2020 and the Writ of Execution is submitted for is­suance on June 30, 2020.

Instructions:

Caption (boxes at top of form)

  •       Fill in the name and address of Quality Dealer as the judgment creditor;
  •       Fill in the address of the Small Claims Court;
  •       Fill in the names of the plaintiff and defendant;
  •       Fill in the case number; and
  •       Check the box for execution on money judgment.

Item 1: Fill in the county where the property to be levied upon is located since that will designate the proper Marshal or Sheriff to be used.

Item 2: Not normally applicable.

Item 3: Check the box indicating original judgment credi­tor and fill in the name of Quality Dealer.

Item 4: Fill in the name of John Jones as the judgment debtor and his last known address. If there is more than one judgment debtor, additional names and addresses should be listed on the reverse side of the form.

Item 5: Fill in June 1, 2020 as the date the judgment was entered.

Items 6, 7, 8, 9, and 10: These items are not nor­mally applicable in pursuing a small claims judg­ment for money. They should be left blank.

Item 11: Fill in the total amount (including principal, interest, and costs) awarded by the trial court. In the example, this amount is $1,000.

Item 12: Costs after judgment are usually is not worth being con­cerned about in pursuing a small claims judgment; however, a judgment creditor may, by filing a Memorandum of Costs form, claim costs incurred in collecting a judgment (for example, the cost of issu­ing an Abstract of Judgment could be claimed in this fashion).

Item 13: Fill in the total of items 11 and 12.

Item 14: This item is applicable only if some part of the judgment has been collected pre­viously.

Item 15: Fill in the total per the form instructions.

Item 16: A judgment creditor is entitled to 10% in­terest on the amount of a judgment awarded starting from the date it is entered and ending on the date of collection. Interest on a small claims judgment is usually a small amount and therefore not a major concern. If this interest is claimed, a judgment creditor must file a declaration under penalty of perjury (court clerks may have forms that can be used for this purpose) which shows the calculation of interest by the judgment creditor. The interest is calculated at a daily rate and then applied as a practical matter to the time from the entry of judgment to the date the Writ of Execution is submitted for issuance. Under the hypothetical given, the daily rate is $0.27 per day (10% times $1,000 divided by 365) and for thirty days (the time from June 1, 2020 to June 30, 2020), the inter­est total is $8.10. If a declaration is not filed, the judgment creditor should simply leave this space blank.

Item 17: Fill in the fee paid to the court for issu­ing a Writ of Execution.

Item 18: Fill in the total of items 15, 16 and 17.

Item 19: (a) Fill in the interest rate calculated by multiplying 10% times the total shown on item 15 and then dividing that amount by 365. In the exam­ple, this is $0.27. Part (b) of this item is not applicable.

Item 20: This item is applicable only if there is more than one judgment debtor and the amounts dif­fer as to each individually.

Reverse Side:

The reverse side of this form is usually not appli­cable unless there is more than one judgment debtor.

A Writ of Execution can be issued for more than one county. In fact, such a Writ is necessary if the judgment creditor wants to pursue an asset held by the judgment debtor in a different county.

While more than one Writ of Execution can be out for levy at one time (i.e. when assets located in two different counties are being pursued), a dealer should avoid this unless the dealer has consulted with an attorney. The reason for this caution is that excessive levying can be a grounds for an abuse of process lawsuit.

Instructing the Levying Officer

Once the Writ of Execution is issued by the court, the judgment creditor must deliver it together with the appropriate number of copies, levy instructions, and levy fees to the Sheriff or Marshal in the county where the levy is to be made. Information as to the number of Writ copies required and the fees for levy can be obtained by contacting the particular Sheriff’s or Marshal’s office involved. It should be noted that the levy fees are based upon the type of asset to be levied upon and can be substantial in amount. For instance, the initial fee deposit to levy upon a motor vehicle is $1,500 in Los Angeles County. The levy instructions should be written (some Sheriff’s or Marshal’s offices have pre-printed forms) and need to accurately describe the asset to be levied upon, its location, and if the property in­volved is a dwelling, whether or not it is real or per­sonal property (for instance a house trailer).

PRACTICAL TIP

For example, a dealer trying to collect a small claims judgment against a judgment debtor by levying upon a bank account should inform the levying officer of the name and address of the bank branch where the judgment debtor is be­lieved to have bank accounts; instruct the officer to levy upon any such accounts held in the judgment debtor’s name; and indicate any specific account numbers if known.

EXAMPLE

A sample instruction is as follows:

“Please levy upon any and all personal property in possession of Bank of America, 6300 Sunset, Hollywood, California, including, but not limited to, all checking accounts, savings accounts, pass­book accounts, savings certificates, securities, bonds, accounts receivable, safe deposit boxes, and any other accounts or property interests held by the defendant John Jones.”

Effect of the Writ

The effect of a levy pursuant to a Writ of Execu­tion depends upon the nature of the asset involved. The applicable statutes direct the levying officer as to how to levy on a wide vari­ety of personal property (i.e. securities, accounts re­ceivable, bank accounts, safe deposit boxes, etc.) as well as real property interests. Other statutes direct the levying officer as to procedures concerning the sale and collection of the various kinds of property subject to levy.

Personal property: In general terms, personal property levied upon is either physically taken pos­session of by the levying officer (for example this would be the approach regarding an automobile) or in ef­fect “frozen” (this would be the approach for a bank account). In either situation, the judgment debtor basically loses the use of the property in­volved and can only regain the property by either causing the judgment to be paid or claiming an ex­emption (see the discussion of exemptions later in this chapter).

If the judgment is not paid, personal property which is in the possession of a levying officer can be sold assuming certain statutory requirements, including a notice requirement, are complied with and the proceeds of such a sale can be applied to pay off the outstanding judgment. Personal property described as frozen can be col­lected by the levying officer for further disposition toward the satisfaction of a judgment. For instance in the case of a bank account, the bank officer forwards funds from the account levied upon directly to the levying officer who in turn can dis­tribute them to the judgment creditor.

Real property: When real property is levied upon, the Writ of Execution is recorded and a lien established. While this lien may be enforced by a sale of real property, the complicated procedures involved make this an inefficient ­method to collect a small claims judgment.

PRACTICAL TIP

A dealer trying to collect on a small claims judgment should strongly consider using a Writ of Execution to pursue specific personal property assets of the judgment debtor which are believed to be valuable enough to satisfy the judgment, if they are collected or sold. If real property interests are being pursued, a recorded Abstract of Judgment is the more practical approach.

Exemptions

Nature: It should be noted that the effectiveness of collecting a small claims judgment using a Writ of Execution may be reduced by exemptions which a judgment debtor may claim regarding certain types of property. These exemptions are created by statute. In general, these exemptions represent protection against the enfor­cement of money judgments on certain property or portions thereof, which might be described as neces­sary to the basic livelihood and well-being of the judgment debtor.

Examples: Some of the exemptions a judgment debtor is entitled to include: an exemption worth $2,300 as to any equity in his or her motor vehicles (note that if the judg­ment debtor has only one motor vehicle this exemp­tion is automatic with no filed claim required); a to­tal exemption for household furnishings, clothes, and personal effects “ordinarily and reasonably neces­sary;” an exemption worth $6,075 as to tools used in the judgment debtor’s trade; and an exemption typically worth $75,000 as to the equity a judgment debtor may have in his or her princi­pal place of residence (if it is a homestead).

NOTE

On Exemptions For Natural Persons: Exemp­tions apply only to property interests of natural persons (for instance they do not apply to property interests of a corporation).

Effect: The effect of a judgment debtor filing a claim of exemption can be the release of the levied property by the levying officer to the extent of the claimed exemption (certain exemptions, for example the one described above concerning equity in a single motor vehicle, apply without a claim being filed). This re­lease will occur if the judgment debtor files a timely claim of exemption with the levying officer. To be timely, a claim of exemption must be filed within 10 days of the service date of the Notice of Levy on the judgment debtor. If the judgment creditor chooses to oppose the claim of exemption (for instance, the judgment creditor thinks it is either invalid or has not been timely filed), the judgment creditor must file timely opposition pa­pers with the levying officer and the court, and also notice a motion for a court hearing to de­termine the dispute. Such opposition papers are timely if they are filed within 10 days of the service of the Notice of Claim of Exemption on the judg­ment creditor.

PRACTICAL TIP

As is readily apparent from the brief discussion above, claims of exemption can lead to in­volved legal proceedings. A dealer receiving a Notice of a Claim of Exemption is advised to contact an attorney immediately to discuss available options.

Third Party Claims

Nature: A dealer using a Writ of Execution to at­tempt to collect a small claims judgment should be aware that in trying to levy (through the efforts of the levying officer) upon assets held by the judgment debtor, third party claims may be encountered. In making such a claim, a third party basically con­tends that the third party has an ownership interest in or a right to possession of the asset levied upon.

Effect: The effect of a third party claim on levied property is similar to the effect of a claim of exemp­tion filed by a judgment debtor. If a timely claim is filed by the third party with the levying officer and the judgment creditor does not file the required un­dertaking in response to protect that third party’s interest, the levied property will be released.

PRACTICAL TIP

As a practical matter, a dealer should be most concerned about third party claims in connection with an effort to levy upon a judgment debtor’s automobile which may be subject to a third party’s security interest. Such an effort is prob­ably worthwhile only if the dealer can clearly de­termine that the judgment debtor has substantial equity in the subject vehicle. This is true since even if the dealer takes those steps necessary to allow the sale of the vehicle to go forward (i.e., filing an undertaking), as the proceeds from such a sale will be distributed to the third party before they can be applied to the outstanding judgment. Additionally, as discussed in this chapter previ­ously, the judgment debtor can claim an exemption of $2,300 as to the sale proceeds.

Wage Garnishment

A specialized judgment enforcement procedure which utilizes a Writ of Execution to collect wages of a judgment debtor di­rectly from an employer is called “wage garnishment”. This procedure should be considered by a dealer pursuing a small claims judgment where in­formation has been developed as to the name and address of the judg­ment debtor’s employer.

How to Obtain a Wage Garnishment

As mentioned above, a judgment creditor must first have a Writ of Execution issued (see prior discussion on how to accomplish this) to take advantage of the wage garnishment procedure. This Writ should be issued for the county where the judgment debtor’s employer is located. It should then be submitted to the Sheriff’s or Marshal’s office for that county with a completed Application for Earnings With­holding Order form.

This Applica­tion is signed under penalty of perjury and in­cludes information as to the identity, address, and social security number of the judgment debtor if known; the name and address of the judgment creditor; the title of the court; the date the judgment was entered; the date the Writ of Execution was issued; the amount to satisfy the Writ of Execution plus the levying officer’s statutory fee for service of the order; the individual or entity to whom withheld money should be paid; and the name and address of the employer.

Effect

Following the receipt of the Writ of Execution and a properly completed Application for Earnings Withholding Order, the levying officer will issue an Earnings Withholding Order. This Order will then be served on the employer identified in the application, who as a re­sult of the service is required to withhold the judg­ment debtor’s wages during the “withholding period” as defined by statute. Any funds withheld are then turned over to the levying officer, who will forward them to the judgment creditor or a representative as desig­nated in the Application for Earnings Withholding Order.

Exemptions Applying to Wage Garnishment

Regarding wage garnishment, a dealer should be aware that statutory exemptions exist which restrict the amount of a judgment debtor’s wages available for garnishment. For instance, automatically 75% of an individual’s wages are ba­sically exempted from wage garnishment pursuant to federal law.

Additionally, wages necessary to support the judgment debtor’s family are also exempt. To claim this latter exemption, a judgment debtor must basically follow the same procedures described  previously in this chapter relating to exemptions applicable to Writs of Execution. Also as discussed previously, a judg­ment creditor can contest the claim of exemption by filing timely opposition and bringing the matter to a hearing before the court.

PRACTICAL TIP

A wage garnishment procedure can be quite effective in collecting a small claims judgment since it has a direct impact on the judgment debtor’s employer. Often, a judgment debtor will act immediately to pay off the judgment so that the wage garnishment will cease.

CAUTION

Cancel Levies When Paid In Full: If a dealer is paid in full on a small claims judgment by the judgment debtor during a period when judgment collection procedures (such as a wage garnishment) are being employed, the dealer should act promptly to contact the Sheriff’s or Marshal’s office involved to request that these collection ef­forts cease immediately.

Use of a Keeper

Another specialized judgment enforcement proce­dure which utilizes a Writ of Execution is the employment of a keeper. This approach should be considered by a dealer if the judgment debtor has an ongoing business. Basically, a keeper is a representative of the Sheriff or Marshal, who is stationed at the judgment debtor’s place of business to collect directly the receipts of this business for ap­plication to the unsatisfied judgment.

To use a keeper, the judgment creditor must first obtain a Writ of Execution for the county in which the place of business is located. Basically this Writ is then submitted to the Marshal’s or Sheriff’s office for that county, together with written instructions in­forming the levying officer of the name and location of the business where a keeper is to be installed and the number of hours he or she should be there. A deposit fee (not minimal) is required as well and depends on the length of time the keeper is to remain. If a dealer has any questions as to how to install a keeper, the dealer should contact directly the Sheriff’s or Marshal’s of­fice in the county where the judgment debtor’s busi­ness is located to determine the exact procedures involved.

PRACTICAL TIP

A keeper is a drastic judgment collection pro­cedure which can be quite effective, but expen­sive. A judgment debtor is highly mo­tivated to arrange to pay off a judgment when faced with an outsider (the keeper) collecting the judgment debtor’s daily business proceeds.

Satisfaction of a Judgment

If a small claims judgment is collected, a judgment creditor should immediately file with the Small Claims Court a Satisfaction of Judgment form. This is important, because if the form is not filed, the judgment debtor can request one to be filed and if that request is not honored by the judgment creditor within 14 days, the judgment creditor can be liable to the judgment debtor for damages, plus a penalty of $50. If an Abstract of Judgment has been recorded with the County Recorder in an effort to collect the judgment, a copy of the Satisfaction of ­Judgment should be filed with the Small Claims Court and served (either in person or by mail) upon the judgment debtor. Where a judgment debtor has proof of payment of a judgment such as a cancelled check, the judgment debtor may request the court clerk to enter a satisfaction of judgment.

A judgment debtor has the option to deposit the funds necessary to satisfy a judgment with the Court where the judgment was entered. The judgment debtor must submit a declaration form and pay a small fee to use this procedure. This procedure can be useful to a dealer who re­ceives an unfavorable judgment and wants to avoid further direct dealings with the judgment creditor re­garding the matter.

Liens on Vehicles and Lien Sales

Overview

A person that repaired, supplied parts or materials, towed, rented a parking space, or stored a vehicle and has not been paid for their services has a lien on the vehicle to help secure payment. A lien is a legal claim on the vehicle that acts as security for payment of the amount owed for the labor, material, storing, towing and rental of a parking space, and becomes effective when the registered owner of the vehicle is given a written statement showing the charges for the completed work or services. 

The basic California statutes that address vehicle liens can be found in the Civil Code and the Vehicle Code. It is important to note that the liens discussed in this chapter only apply to “vehicles,” which are defined to include “a device by which any person or property may be propelled, moved, or drawn upon a highway, excepting a device moved exclusively by human power or used exclusively upon stationary rails or tracks.” The liens referred to in this discussion  do not apply to any manufactured homes, any mobilehomes, or any commercial coaches as defined in Health and Safety Code.

General information on how to conduct a lien sale in California can be found in the Vehicle Industry Registration Procedures Manual on the DMV’s website at:
https://www.dmv.ca.gov/portal/handbook/vehicle-industry-registration-procedures-manual-2/

Types of Liens

Labor and Material Liens

In order to have a lien a dealer must be in actual possession of the vehicle.

The lien operates as a charge against the vehicle for the compensation for making repairs or for performing labor upon, and furnishing supplies or materials for, and for the storage, repair, or safekeeping of, and for the rental of parking spaces for, any vehicle of a type subject to registration under the Vehicle Code, subject to the exceptions noted in the overview above.

While a lien may be effective against a vehicle for the entire value of the services or materials provided to the registered owner of a vehicle, there are statutory limits on the amount that can be recovered against the legal owner (lienholder) or lessor.  Specifically, no lien for work or services is valid against a legal owner or lessor for more than $1,500, unless the legal owner or lessor has given its written consent to the work or services prior to the commencement of the work or services.   For example, if a dealership repair shop obtains the registered owner’s written consent to replace the engine in his or her vehicle for the sum of $10,000, and assuming that the registered owner fails or refuses to pay for the repairs, the legal owner or lessor’s legal liability for the return of the vehicle to it is capped at the statutory sum of $1,500, unless the repairer obtains the written consent from the legal owner or lessor in advance of commencing this work.  This scenario typically plays out when a repairer completes the engine replacement and is not paid by the registered owner, applies for a vehicle lien sale, and then receives notice from the DMV that the legal owner or lessor has objected to the proposed lien sale.  Now that the legal owner or lessor has notice that the vehicle is being held at the dealership, the legal owner or lessor will typically demand the return of the vehicle (assuming that the customer is in default under its contract or lease obligations), and will offer to pay the dealership the statutory sum of $1,500 for the engine replacement.  Again, if the repairer failed to obtain the legal owner or lessor’s written consent prior to commencing the work on the vehicle, the repairer’s claim against the legal owner or lessor will be capped by $1,500, and the repairer will then have to pursue to the registered owner for the remaining balance owed on the repair invoice.

CAUTION

Regarding Demand for Inspection of the Vehicle: California law provides that any labor and materials lien or storage lien under this section that arises because work or services have been performed on a vehicle with the consent of the registered owner shall be extinguished, and no lien sale shall be conducted, if the lienholder, after written demand made by either personal service or certified mail with return receipt requested by the legal owner or the lessor to inspect the vehicle, fails to permit that inspection by the legal owner or lessor, or his or her agent, within a period of time not sooner than 24 hours nor later than 72 hours after the receipt of that written demand, during the normal business hours of the lienholder.

Regarding Demand For Copy Of Work Order Or Invoice: The California statute that covers vehicle liens further provides that any labor and materials lien or storage lien that arises because work or services have been performed on a vehicle with the consent of the registered owner shall be extinguished, and no lien sale shall be conducted, if the lienholder, after written demand made by either personal service or certified mail with return receipt requested by the legal owner or the lessor to receive a written copy of the work order or invoice reflecting the services or repairs performed on the vehicle and the authorization from the registered owner requesting the lienholder to perform the services or repairs, fails to provide that copy to the legal owner or lessor, or his or her agent, within 10 days after the receipt of that written demand.

NOTE

On Major Repairs: If the repairs are substantial, a dealer should try to obtain the legal owner or lessor’s written consent before beginning the work. If a dealer can obtain the legal owner’s or lessor’s consent, or if the legal owner or lessor requests the work, a dealer will have a lien for the entire amount of parts and labor against the legal owner or lessor, and a dealer will not be capped at the statutory sum of $1,500.

There is no limit to the lien amount against the registered owner. However, the lienholder may not charge the legal owner an amount for release of the vehicle that exceeds the $1,500 for work or services, and an amount which exceeds the amounts allowed for storage discussed below unless the legal owner has consented in writing to the work, or has requested such work, prior to the commencement of the work.

Storage and Parking Liens

California law also provides for a lien for storage or safekeeping of a vehicle and for the rental of parking space for a vehicle. If stored by public authorities and others, different rules apply as discussed below in the section of this chapter entitled “TOWING AND STORAGE LIENS FOR VEHICLE AUTH­ORIZED TO BE REMOVED BY A PUBLIC AGENCY AND OTHERS.” That section discusses further limits on storage charges and towing liens.

Similar to the statutory cap placed on the amounts recoverable against legal owners or lessors that have not given their prior written consent for the work or services, no lien for storage, safekeeping, or rental of a parking space is valid against the legal owner or lessor for more than $1,025 unless, before commencing the work, the dealer has given the legal owner written notice by personal service or registered mail addressed to the legal owner named in the registration certificate, and has obtained the legal owner’s written consent to the work, or the legal owner or lessor has requested such work. If, however, the repairer applies for a lien sale within 30 days after commencement of the storage or safekeeping, the repairer can have a valid lien against the legal owner or lessor without the legal owner’s or lessor’s consent for up to $1,250, or an increase of up to an additional $225. There are no limits on the lien amount against the legal owner or lessor if the legal owner or lessor actually requests the storage, safekeeping, or rental.  In the event that a legal owner or lessor provides its written consent for the repairs or services on a vehicle, a good argument may be made that by requesting such services the legal owner or lessor has also consented to storage charges if the repairs are not paid for timely.

If any portion of a lien includes charges for the care, storage, or safekeeping of, or for the rental of parking space for, a vehicle for a period in excess of 60 days, the portion of the lien that accrued after the expiration of that period is invalid unless, Vehicle Code sections 10650 and 10652 have been complied with by the holder of the lien. There is a further limitation provided by Vehicle Code section 10652.5 which provides as follows:

  1. Whenever the name and address of the legal owner of a motor vehicle is known, or may be ascertained from the registration records in the vehicle or from the records of the Department of Motor Vehicles, no fee or service charge may be imposed upon the legal owner for the parking and storage of the motor vehicle except as follows: (1) the first 15 days of possession and (2) following that 15-day period, the period commencing three days after written notice is sent by the person in possession to the legal owner by certified mail, return receipt requested, and continuing for a period not to exceed any applicable time limit set forth in section 3068 or 3068.1 of the Civil Code.
  2. The costs of notifying the legal owner may be charged as part of the storage fee when the motor vehicle has been stored for an indefinite pe­riod of time and notice is given no sooner than the third day of possession. This subdivision also applies if the legal owner refuses to claim pos­session of the motor vehicle.
  3. In any action brought by, or on behalf of, a legal owner of a motor vehicle to which subdivision (a) applies, to recover a motor vehicle alleged to be withheld by the person in possession of the motor vehicle by demanding storage fees or charges for any number of days in excess of that permitted pursuant to subdivision (a), the prevailing party shall be entitled to reasonable attorney’s fees, not to exceed one thousand seven hundred fifty dollars ($1,750). The recovery of those fees is in addition to any other right, remedy, or cause of action of that party.
  4. This section is not applicable to any motor vehicle stored by a levying officer acting under the authority of judicial process.
NOTE

On Applicability of Vehicle Code Sections 10650-10652.5:  Vehicle Code sections 10650- 10652.5 appear in Division 4 of the Vehicle Code dealing with Special Antitheft Laws. Although Civil Code section 3068 provides that its storage amount limits are “subject to the limitations” of section 10652.5, arguably Vehicle Code sections 10650-10652.5 do not apply against a registered owner who is also the legal owner when that owner has placed the vehicle in the dealer’s possession, or is aware that the vehicle is in the dealer’s possession. If a dealer wants to consider this argument, an attorney should be consulted regarding the particular situation.

Vehicle Code section 10650 provides as follows:

  1. Every operator of a towing service and every keeper of a garage or trailer park shall keep a written record of every vehicle of a type subject to registration under this code stored for a pe­riod longer than 12 hours.
  2. The record shall contain the name and address of the person storing the vehicle or requesting the towing, the names of the owner and driver of the vehicle, if ascertainable, and a brief descrip­tion of the vehicle including the name or make, the motor or other number of the vehicle, the nature of any damage to the vehicle, and the li­cense number and registration number shown by the license plates or registration card, if either of the latter is attached to the vehicle in a clearly discernible place.
  3. All records shall be kept for one year from the commencement of storage and shall be open to inspection by any peace officer.
  4. Upon termination of the storage, a statement shall be added to the record as to the disposition of the vehicle, including the name and address of the person to whom the vehicle was released and the date of such release.

The records required by this Vehicle Code section apply to every operator of a towing service and every keeper of a garage. A garage is defined under the Vehicle Code as follows: “A ‘garage’ is a building or other place wherein the business of storing or safekeeping vehicles of a type required to be registered under this code and which belong to members of the general public is conducted for compensation.” An argument might be made that a repair shop is a garage if the repair shop charges storage for vehicles left there. A repair shop is not normally a garage; however, to be on the safe side, a dealer should keep the records required by Vehicle Code section 10650.

Vehicle Code section 10652 provides as follows:

Whenever any vehicle of a type subject to registration under this code has been stored in a garage, repair shop, parking lot, or trailer park for 30 days, the keeper shall report such fact to the Department of Justice in Sacramento by receipt mail, which shall at once notify the legal owner as of record. This section shall not apply to any vehicle stored by a peace officer or employee designated in section 22651 pursuant to Article 3 (commencing with section 22850) of Chapter 10 of Division 11.

The notice should be given as soon as the 30 days have passed.

CAUTION

Regarding Charging For Storage: It appears that under California law there may be an argument that a dealer may not be able to charge storage for the vehicle during the time a dealer is holding it for payment under the lien. Specifically, the statute provides: “One who holds property by virtue of a lien thereon, is not entitled to compensation from the owner thereof for any trouble or expense which he incurs respecting it….” California court cases have interpreted this statute to mean the repair shop owner may not claim storage expenses if the repair shop owner retains the vehicle in exercise of the repairer’s lien rights. A dealer might be able to claim storage if there were circumstances requiring the dealer to protect the property from unexpected or unusual injury. If a signed repair order provides for compensation to a dealer for reason­able storage costs if the vehicle is not picked up and paid for within reasonable time after completion of the repairs, a dealer has a good argument for claiming storage expenses and that the expenses are a lien on the vehicle. Also, if the customer has simply failed to pick up the vehicle after it has been repaired and has no argument about the bill, a dealer has a good argument to claim a lien for storage at least until the time the customer should dispute the bill and demand possession of the vehicle. It can be argued that the storage lien in Civil Code section 3068 overrules the Owens case which appears to have been decided before the legislature added the storage lien amounts to Civil Code section 3068. Further, Civil Code section 3068(c)(3) provides as follows:

The charge for the care, storage, or safekeeping of a vehicle which may be charged to the legal owner or lessor shall not  exceed that for one day of storage if, 24 hours or less after the vehicle is placed in storage, a request is made for the release of the vehicle. If the request is made more than 24 hours after the vehicle is placed in storage, charges may be imposed on a full, calendar-day basis for each day, or part thereof, that the vehicle is in storage.

Subject to the rules discussed elsewhere in this Guide, there is no limit on the amount of the lien against the registered owner.

Towing and Storage Liens for Vehicles Authorized for Removal by a Public Agency and Others

California law provides that every person has a lien dependent upon possession for the compensation to which the person is legally entitled for towing, storage, or labor associated with recovery or load salvage of any vehicle subject to registration that has been authorized to be removed by a public agency, a private property owner pursuant to section 22658 of the Vehicle Code, or a lessee, operator, or registered owner of the vehicle. The lien is deemed to arise on the date of possession of the vehicle. Possession is deemed to arise when the vehicle is removed and is in transit, or when vehicle recovery operations or load salvage operations have begun.

CAUTION

Regarding Different Storage Amounts For Vehicles Removed By Public Agency:  There are statutes in the Vehicle Code generally dealing with removal of parked and abandoned vehicles. If a vehicle is being stored under these statutes, then there are limits on fees that can be charged. Specifically these statutes provide as follows:

(a) (1) Whenever a vehicle has been removed to a garage under this chapter and the keeper of the garage has received the notice or notices as provided herein, the keeper shall have a lien dependent upon possession for his or her compensation for towage and for caring for and keeping safe the vehicle for a period not exceeding 60 days or, if an application for an authorization to conduct a lien sale has been filed pursuant to Section 3068.1 of the Civil Code within 30 days after the removal of the vehicle to the garage, 120 days and, if the vehicle is not recovered by the owner within that period or the owner is unknown, the keeper of the garage may satisfy his or her lien in the manner prescribed in this article. The lien shall not be assigned. Possession of the vehicle is deemed to arise when a vehicle is removed and is in transit, or when vehicle recovery operations or load salvage operations that have been requested by a law enforcement agency have begun at the scene.

(2) Whenever a vehicle owner returns to a vehicle that is in possession of a towing company prior to the removal of the vehicle, the owner may regain possession of the vehicle from the towing company if the owner pays the towing company the towing charges.

(b) No lien shall attach to any personal property in or on the vehicle. The personal property in or on the vehicle shall be given to the current registered owner or the owner’s authorized agent upon demand and without charge during normal business hours. Notwithstanding any other provision of law, normal business hours are Monday to Friday, inclusive, from 8 a.m. to 5 p.m., inclusive, except state holidays. A gate fee may be charged for returning property after normal business hours, weekends, and state holidays. The maximum hourly charge for nonbusiness hours releases shall be one-half the hourly tow rate charged for initially towing the vehicle, or less. The lienholder is not responsible for property after any vehicle has been disposed of pursuant to this chapter.

A person seeking to enforce a lien for the storage and safekeeping of a vehicle shall impose no charge exceeding that for one day of storage if, 24 hours or less after the vehicle placed in storage, the vehicle is released. If the release is made more than 24 hours after the vehicle is placed in storage, charges may be imposed on a full, calendar-day basis for each day, or part thereof, that the vehicle is in storage. If a request to release the vehicle is made and the appropriate fees are tendered and documentation establishing that the person requesting release is entitled to possession of the vehicle, or is the owner’s insurance representative, is presented within the initial 24 hours of storage, and the storage facility fails to comply with the request to release the vehicle or is not open for business during normal business hours, then only one day’s charge may be required to be paid until after the first business day. A “business day” is any day in which the lienholder is open for business to the public for at least eight hours. If the request is made more than 24 hours after the vehicle is placed in storage, charges may be imposed on a full-calendar day basis for each day or part thereof, that the vehicle is in storage.

If the vehicle has been determined to have a value not exceeding $4,000, the lien shall be satisfied pursuant to the statutes discussed in the section of this chapter entitled “Sale of Vehicle Valued At $4,000 Or Less”. The lien sale proceedings must commence within 15 days of the date the lien arises (date of possession of the vehicle). No storage shall accrue beyond the 15-day period unless the lien sale proceedings pursuant to section 3072 have commenced. The storage lien may be for a period not exceeding 60 days if a completed notice of a pending lien sale form has been properly filed within 15 days after the lien arises. In spite of the 60-day limitation, the storage lien may be for a period not exceeding 120 days if any of the following occurs:

  1. A Declaration of Opposition is filed with the department pursuant to section 3072 discussed below.
  2. The vehicle has an out-of-state registration.
  3. The vehicle identification number was altered or removed.
  4. A person who has an interest in the vehicle becomes known to the lienholder after the lienholder has complied with subdivision (b) of section 3072.

If the vehicle has been determined to have a value exceeding $4,000 (as determined under the Vehicle Code), then the lien is to be satisfied pursuant to a different Civil Code discussed below. If an application for authorization to conduct a lien sale has been filed in accordance with this statute, the storage lien may be for a period not exceeding 120 days.

Any lien for a vehicle with a value exceeding $4,000 shall be extinguished, and no lien sale shall be conducted, if any one of the following occurs:

  1. The lienholder, after written demand to inspect the vehicle made by either personal service or certified mail with return receipt requested by the legal owner or the lessor, fails to permit the inspection by the legal owner or lessor, or his or her agent, within a period of time within at least 24 hours, but not to exceed 72 hours, after receipt of that written demand, during the normal business hours of the lienholder. The legal owner or lessor shall comply with inspection and vehicle release policies of the impounding public agency.
  2. The amount claimed for storage exceeds the posted rates.

Right of Tow Truck Operator to Deficiency Claim

A tow truck operator who has a lien on a vehicle pursuant to Vehicle Code section 3068.1 has a deficiency claim against the registered owner of the vehicle if the vehicle is not leased or leased with a driver for an amount equal to the towing and storage charges, not to exceed 120 days of storage, and the lien sale processing fee pursuant to section 3074, less the amount received from the sale of the vehicle.

A tow truck operator who has a lien on a vehicle pursuant to section 3068.1 has a deficiency claim against the lessee of the vehicle if the vehicle is leased without a driver for an amount equal to the towing and storage charge, not to exceed 120 days of storage, and the lien sale processing fee described in section 3074, less the amount received from the sale of the vehicle.

Storage costs incurred after the sale shall not be included in calculating the amount received from the sale of the vehicle.

A registered owner who has sold or transferred his or her vehicle prior to the vehicle’s removal and who is not responsible for creating the circumstances leading to the removal of the vehicle is not liable for any deficiency under Civil Code section 3068.2 if that registered owner executes a notice pursuant to the section 5900 of the Vehicle Code and submits the notice to the Department of Motor Vehicles. The person identified as the transferee in the notice submitted to the Department of Motor Vehicles shall be liable for the amount of any deficiency only if that person receives notice of the transfer and is responsible for the event leading to abandonment of the vehicle or requested the removal.

Except as provided in section 22524.5 of the Vehicle Code, if the transferee is an insurer and the transferor is its insured or his or her agent or representative, the insurer shall not be liable for any deficiency, unless the insurer agrees at the time of the transfer, to assume liability for the deficiency.

Enforcement of Liens

The lien arises at the time a written bill for the completed work or services is presented to the registered owner, or 15 days after the work or services are completed, whichever occurs first. If the bill is mailed, to be on the safe side a dealer should use the date the bill is mailed as the date the lien arises. When the bill is mailed, a dealer might, however, be able to argue for a date later than the date of mailing under certain statutes. For evidence of mailing, it is advisable to send the letter certified or registered, return receipt requested, and regular First Class U.S. Mail. A note should be made on a dealer’s records of the date of mailing or the date of physical presentation of the written bill, as well as the registered/certified mail receipt information for purposes of later proving that it was properly and timely sent.

CAUTION

Regarding The Importance Of Date Bill Presented: The date the bill is presented triggers certain time periods discussed below. This is an extremely important date. As stated above, the lien arises in any event no later than 15 days after the work or services are completed, or when the bill is presented, whichever occurs first.

The lien for labor and materials is extinguished unless a dealer does one of two things:

  1. Applies for authority to conduct the lien sale within 30 days after the first of the following has occurred: the bill has been presented to the registered owner, or 15 days after the work or services are completed. (Reg. form 656 for vehicles valued over $4,000; see later discussion for vehicles valued at $4,000 or less); or
  2. Files a court action within 30 days after the first of the following has occurred: the bill has been presented to the registered owner, or 15 days after the work or services are completed.
CAUTION

Do Not Let Lien Expire Because Of Failure To Apply For Lien Sale Or File Court Action: A very common failure of dealers is that they let their lien expire without applying to the DMV for the lien sale or filing a court action within the proper time periods. If the lien expires, a dealer cannot get it back. Also, if the vehicle has been stored in accordance with Civil Code section 3068.1 discussed above, then dealers should watch out for the shorter time periods provided for in that section.

Do Not Allow Lien To Expire Because Of Failure To Allow Inspection: Civil Code section 3068(b)(3) provides that any lien under this section that arises because work or services have been performed on a vehicle with the consent of the registered owner shall be extinguished, and no lien sale shall be conducted, if the lienholder, after  written demand made by either personal service or certified mail with return receipt requested by the legal owner or the lessor to inspect the vehicle, fails to permit that inspection by the legal owner or lessor, or his or her agent, within a period of time not sooner than 24 hours nor later than 72 hours after the receipt of that written demand, during the normal business hours of the lienholder.

Do Not Let Lien Expire Because Of Failure To Provide Work Order Or Invoice: Civil Code Section 3068(b)(4) provides that any lien under this section that arises because work or services have been performed on a vehicle with the consent of the registered owner shall be extinguished, and no lien sale shall be conducted, if the lienholder, after written demand made by either personal service or certified mail with return receipt requested by the legal owner or the lessor to review a written copy of the work order or invoice reflecting the services or repairs performed on the vehicle and the authorization from the registered owner requesting the lienholder to perform the services or repairs, fails to provide that copy to the legal owner or lessor, or his or her gent, within 10 days after the receipt of that written demand.

NOTE

Obligation To Turn Over Vehicle To Legal Owner When Lien Expires: Civil Code section 3068 provides that a person whose lien for work or services on a vehicle has been extinguished shall turn over possession of the vehicle, at the place where the work or services were performed, to the legal owner or lessor upon demand of the legal owner or lessor, and upon tender by the legal owner or lessor, by cashier’s check or in cash, of only the amount for storage, safekeeping, or parking space rental for the vehicle to which the person is entitled under Civil Code section 3068. Failure to comply with the legal owner’s or lessor’s demand might additionally subject the repairer to a claim of conversion of property, and thereby a claim for all damages arising from the conversion, including possible puni­tive damages.

Liability For Attorneys’ Fees: In any action brought by or on behalf of the legal owner or lessor to recover a vehicle alleged to be wrongfully withheld by the person claiming a lien pursuant to Civil Code section 3068, the prevailing party shall be entitled to reasonable attorneys’ fees and costs, not to exceed $1,750.

Tender of Cash and Claims by Legal Owner

Under California law if the legal owner tenders cash to a dealer in the amount of the valid lien against the legal owner, and if the dealer refuses the cash, the dealer has then waived the entire lien against the legal owner. If the vehicle is subsequently recovered or repossessed from the dealer by the legal owner through court proceedings or otherwise, the dealer will not be able to recover any lien amount from the legal owner. Additionally, a dealer can be liable for the legal owners or lessor’s attorneys’ fees up to $1,750.

What if the legal owner or lessor wants to repossess the vehicle and states that the customer’s contract is in default?

If the legal owner or lessor agrees to pay that part of the lien that is valid or enforceable as against the legal owner/lessor, a dealer must consider releasing the vehicle to the legal owner in exchange for payment. Before a dealer does this, however, the dealer should attempt to contact the registered owner to advise him or her of the legal owner’s claims and to see if the registered owner agrees with those claims. A dealer should consider obtaining a sworn statement from the legal owner attesting to (i) the legal owner’s right to possession of the vehicle via a security interest or certificate of title, and (ii) the registered owner’s default under the applicable contract.  In addition, a dealer should obtain copies of the legal owner’s documentation supporting its claim. Finally, before a dealer turns the vehicle over to the legal owner, a dealer should attempt to have the legal owner indemnify and hold the dealer harmless from any claims against the dealer from the registered owner relating to the release of the vehicle.

If a dealer withholds releasing the vehicle from valid claims of a legal owner that has tendered payment of the statutory sums for which it is liable, the dealer runs the risk of being subject to a claim for conversion of the vehicle and resulting damages that flow from conversion. In addition, California law provides that “in any action brought by or on behalf of the legal owner or lessor to recover a vehicle alleged to be wrongfully withheld by the person claiming a lien…, the prevailing party shall be entitled to reasonable attorney’s fees and costs, not to exceed one thousand seven hundred fifty dollars ($1,750).” Furthermore, the California courts have held that a repairer that refuses to release a vehicle to a legal owner that has tendered the statutory sums provided for under the lien law waives its right for any lien whatsoever against the legal owner. When there are conflicting claims made by the legal owner and the customer, a dealer can file a court action called an “Interpleader” which in effect would require that the legal owner and customer fight it out in court. Filing such an action releases the dealer from any liability. The dealer, however, cannot without some legal risks stonewall the legal owner and force the legal owner to obtain a court order for possession of the repaired vehicle. As always, the advice of legal counsel should be used when there is any doubt about how to proceed.

Labor and Materials Lien When Registered and Legal Owner the Same

There are no limits on the amount of the labor and materials lien when the registered owner and the le­gal owner are the same. However, there are limits to storage liens discussed above in the section of this chapter entitled “TOWING AND STORAGE LIENS FOR VEHICLES AUTHORIZED TO BE REMOVED BY A PUBLIC AGENCY AND OTHERS” when the vehicle has been stored by public authorities or others.

Assignment of Liens

Liens for labor and materials, or for storage or safekeeping of a vehicle when abandoned on private property, can be assigned to another in writing ac­companied by delivery of possession of the vehicle, and the person to whom the lien has been assigned can exercise the right of the lienholder. When the lienholder assigns a lien, the dealer must give notice of the assignment, either by per­sonal delivery or registered or certified mail, to the registered and legal owner, including the name and address of the person to whom the lien is assigned. Under Vehicle Code section 22851(a), the lien for storage and towing when a vehicle is removed to a garage under Chapter 10 of Division 11 of the Vehicle Code may not be assigned.

PRACTICAL TIP

A dealer may wish to consider hiring a company who specializes in handling  vehicle lien sales to complete all of the necessary forms, mailings and other tasks required in order to properly handle a lien sale from start to finish. They may or may not want an assignment of the lien to them, which is permissible under California’s vehicle lien laws. If a dealer is not going to have a service company lien sell the vehicle, the dealer should make sure the lien is not extinguished by expiration of the time periods. See discussion in the section above enti­tled “ENFORCEMENT OF LIENS.”

Revival of Lost Liens

Sometimes a dealer loses possession of a vehicle on which there is a lien by trick or fraud of the regis­tered owner. In these cases, the vehicle may be re­possessed by the dealer and the repossession revives the lien. However, if anyone acquires an interest in the vehicle in good faith for value between the loss of possession and the repossession, the dealer’s lien is subordinate to the third party’s interest. It is a misde­meanor for a person to obtain possession of a vehicle subject to a lien by fraud or trick. However, a dealer must remember to not use the threat of criminal action (for example, reporting a vehicle as stolen), to help collect a debt. Using such a threat could be construed as extortion under California  law.

CAUTION

Before a Repossession: Before a dealer repossess a vehicle which was subject to a lien, the dealer should check with legal counsel. There are some traps for the unwary in this area which could subject a dealer to a claim for substantial damages from the customer, including the potential for punitive damages.

Can a dealer repossess the vehicle if a dealer loses a lien be­cause the registered owner’s check bounces?

Always check with legal counsel in this situation. A dealer must be able to show fraud on the part of the customer in order to repossess. To show fraud, a dealer must show an intent on the part of the customer to deceive the dealer at the time the check is presented. If a dealer can show that the bank account on which the check was drawn did not exist, or some similar fraud, a dealer may be able to repossess the vehicle if the dealer can do so peacefully. A customer’s claim that he or she intended to cover the check in an overdrawn account, but was unable to do so because of something unforeseen, could tend to disprove fraud.  Dealers should consult with legal counsel before putting a vehicle out for repossession.

Misdemeanor Violations

It is a misdemeanor for any person claiming a lien on a vehicle to knowingly violate any provisions of sections 3067, and following, of the Civil Code dealing with Liens on Vehicles.

Improper Towing or Removal

California law provides for damages and attorneys’ fees against any person who improperly causes a vehicle to be towed or removed in order to create or acquire a lienhold interest in the vehicle. The law specifies seven different ways of “improperly causing a vehicle to be towed or removed.” Therefore, any dealer who causes a vehicle to be towed or removed in order to create or acquire a lienhold interest in a vehicle should be thoroughly familiar with all of the details of this code section in order to avoid a finding that the vehicle was improperly towed or removed.

Procedures for Conducting Lien Sale

Sale of Vehicles Valued Over $4,000

The following discussion covers the DMV forms that must be used and provides for the detailed steps that must be taken to conduct a lien sale for a vehicle valued over $4,000. This discussion assumes that a dealer is acting before the lien has expired (See prior discussion, Enforcement of Liens). The DMV sometimes changes the names and numbers of the forms, so a dealer should confirm with the DMV that the correct forms are being used (See the DMV website entitled “How To: Conduct A Lien Sale For A Vehicle Stored At A Self-Service Storage Facility Or Valued Over $4,000”https://www.dmv.ca.gov/portal/how-to-conduct-a-lien-sale-for-a-vehicle-stored-at-a-self-service-storage-facility-or-valued-over-4000-htvr-8/).

If a dealer is conducting a lien sale, the dealer should review this website. It contains all the steps and forms to conduct the lien sale. If a dealer has any questions about conducting a lien sale, the dealer may call the DMV Lien Sales Unit at (916) 657-7617.

In order to start the process to obtain approval from the DMV to conduct a lien sale of a vehicle with a value determined to be over $4,000, an application (DMV Reg. form 656) and an application fee must be submitted to the DMV. The application fee may be recovered from either the buyer at the time of the lien sale, or from the customer/debtor if the vehicle is redeemed.

When the DMV receives the application it notifies the registered and legal owners that they have a right to a court hearing over the question of the lien. If a court hearing is desired, a Declaration of Opposition must be signed and returned to the DMV within 10 days. If the Declaration of Opposition is returned to the DMV, a dealer will receive notice from the DMV and the dealer will not be able to sell the vehicle unless  the dealer obtains either a court judgment or a release from the opposing party, or if the defendant cannot be served as described in subsection (e) of Civil Code section 3071 described below. The release form is on the DMV letter advising a dealer of the opposition. The DMV must notify the dealer within 16 days of its receipt of the Declaration of Opposition. A dealer must then file a court action within 30 days of the notice from the DMV and obtain a judgment after which the dealer may conduct a lien sale.

If a money judgment is entered in favor of the lienholder and the judgment is not paid within five days after becoming final, then the judgment may be enforced by lien sale proceedings conducted pursuant to subdivision (f) of Civil Code section 3071, described below.

Civil Code section 3071(e) provides for an easy way to serve the court action on the opposing party by certified mail, return receipt requested, at the address shown on the Declaration of Opposition. A dealer can also serve the opposing party in person. If the lienholder has served the declarant by certified mail at the address shown on the Declaration of Opposition form and the mail has been returned unclaimed, or if the lienholder has attempted to effect service on the declarant in person with a marshal, sheriff, or a licensed process server and the marshal, sheriff, or licensed process server has been unable to effect service on the declarant, the lienholder may proceed with the judicial proceeding or proceed with the lien sale without a judicial proceeding. The lienholder shall notify the Department of Motor Vehicles of the inability to effect service on the declarant and shall provide the Department of Motor Vehicles with a copy of the documents with which service on the declarant was attempted. Reg. form 659 should be used to notify the DMV of the unsuccessful service. Upon receipt of the notification of an unsuccessful service, the Department of Motor Vehicles shall send authorization of the sale to the lienholder and send notification of the authorization to the declarant.

If the DMV receives no Declaration of Opposition to a dealer’s application to conduct the lien sale, the applicant will receive an authorization from DMV to conduct the lien sale. Dealers should then comply with all of the following requirements:

  1. Pick a date for the sale no more than 20 days from the date of the advertisement below. (Do not count the day of sale.)
  2. Give notice of the sale by advertising once in a newspaper of general circulation published in the county in which the vehicle is located. The advertisement must appear at least 5 days, but not more than 20 days, prior to the sale, not counting the day of sale. If there is no newspaper published in the county, notice shall be given by posting a Notice of Sale form in three of the most public places in the town in which the vehicle is located, and at the place where the vehicle is to be sold, for 10 consecutive days prior to and including the day of the sale. In providing information to the newspa­per, specify the make, year, model, body type, identification number, li­cense number (and state of issuance and year of license), state of registration (if available), and the specific date, exact time, and place of sale.
  3. Send a Notice of Pending Lien Sale (Reg. form 280) 20 days prior to the date of sale (not count­ing the day of sale) by certified mail, return re­ceipt requested, to the legal owner and to the reg­istered owners of record, if the vehicle is regis­tered in this state, and to any interested parties. The lienholder must also notify the DMV Lien Sale Unit of the sale by certified mail, whether or not the vehicle is registered in this state. The no­tices shall specify the make, year, model, body type, vehicle identification number, license number (and year of license and state of issuance), and state of registration (if available) of the vehicle, and the specific date, exact time, and place of the sale.
  4. Maintain the vehicle for inspection at a location easily accessible to the public for at least one hour before the sale at the place of sale and at the time and date specified in the above notices.
  5. Sealed bids are unacceptable.
  6. The sale must always be conducted in a commercially reasonable manner.
  7. Following the sale of a vehicle, the person who conducts the sale must (1) remove and destroy the vehicle’s license plate; and (2) within five days of the sale, submit a completed “Notice of Release of Liability” form to the DMV.
  8. Advise buyer of redemption rights of owner discussed below. A dealer should get the dealer’s money at the time of the sale and not wait for the redemption period to run; otherwise the buyer might not pay and it appears that the dealer would have to start the sale proceedings again. A dealer needs to give the buyer Reg. form 168, Certification of Lien Sale signed by the seller. The buyer will also need Reg. form 343, Application for Title or Registration.
CAUTION

Void Lien Sales: Any lien sale under Civil Code section 3071 regarding vehicles valued over $4,000, and any lien sale in accordance with Civil Code section 3072 regarding vehicles valued at $4,000, or less, is void if the lien holder does not comply with the rules in Civil Code sections 3067-3074. Any lien or fees or storage charges for parking and storage of a motor vehicle is subject to section 10652.5 of the Vehicle Code quoted earlier in this Chapter.

Right of Registered or Legal Owner to Redeem Vehicle after Lien Sale

A dealer must hold the sold vehicle for 10 days because within 10 days after any lien sale (except of a vehicle valued at $4,000 or less), the legal or registered owner may redeem the vehicle upon the payment of the amount of the sale and all costs and expenses of the sale, together with interest on such sum at the rate of 12% per annum from the due date or the date when the same were advanced until the repayment. If the vehi­cle is not redeemed, all of the lien sale documents re­quired by the DMV should be completed and deliv­ered to the buyer.

Charges for Lien Sale Preparation

 The lienholder may charge a fee for lien-sale preparation not exceeding seventy dollars ($70) in the case of a vehicle having a value determined to be four thousand dollars ($4,000) or less and not to exceed one hundred dollars ($100) in the case of a vehicle having a value determined to be greater than four thousand dollars ($4,000), from any person who redeems the vehicle prior to disposal or is paid through a lien-sale pursuant to the vehicle lien laws in the Civil Code. These charges may commence and become part of the possessory lien when the lienholder requests the names and addresses of all persons having an interest in the vehicle from the Department of Motor Vehicles. Not more than fifty percent (50%) of the allowable fee may be charged until the lien-sale notifications are mailed to all interested parties and the lienholder or registration service agent has possession of the required lien processing documents. This charge shall not be made in the case of any vehicle redeemed prior to 72 hours from the initial storage.

Release of Owner’s Interest in Ve­hicle

A registered or legal owner may release any interest in a vehicle after the lien has arisen. The release must be dated when signed and a copy given to the releasing party at the time of signing.

Sale of Vehicle Valued at $4,000 or Less

California’s vehicle lien laws also provide for an abbreviated method for a lien sale of a vehicle with a value determined to be $4,000 or less. The DMV has a very informative section on its website entitled “How To: Conduct A Lien Sale For A Vehicle Valued $4,000 or Less” at: https://www.dmv.ca.gov/portal/how-to-conduct-a-lien-sale-for-a-vehicle-valued-at-4000-or-less-htvr-7/

This section explains in detail the steps to be taken, and the required forms. If a dealer has any questions about conducting a lien sale, the dealer may call the DMV Lien Sales Unit at (916) 657-7617.

To commence lien sale proceedings on a vehicle valued at $4,000 or less, the dealer must make a written request to the DMV for information on the vehicle’s registered and legal owners.  This request is made on the DMV’s Registration Information Request for Lien Sale (DMV form INF 1126), which includes a description of the vehicle, including make, year, model, identification number, license number, and state of registration. If the vehicle identification number is not available, the Department of Motor Vehicles will request an inspection of the vehicle by a peace officer, licensed vehicle verifier, or departmental employee before releasing the names and addresses of the registered and legal owners and interested parties.

PRACTICAL TIP

In most instances the lienholder can secure registered owner and legal owner information through the local DMV office. If this service is not available, the lienholder may secure the information by submitting the Registration Information Request For Lien Sale Vehicle Valued Under $4,000 (form INF 1126), together with the required fee directly to the DEPARTMENT OF MOTOR VEHICLES P.O. Box 944247-Mail Sta G-199, Sacramento, California 94244-2470. The form can be obtained from the DMV’s website at:

https://www.dmv.ca.gov/portal/uploads/2020/03/inf1126.pdf

CAUTION

Regarding Lien Date When Stored By Public Authorities: The lien for labor, materials, and storage is deemed to arise upon presentation to the registered owner of a bill, or 15 days after the work or services are completed, whichever occurs first. When stored by public agencies or others, the towing and storage lien arises on the date of pos­session.

The Notice of Pending Lien Sale form and a blank Declaration of Opposition form should be mailed immediately after receipt of the names and addresses of the registered owner, legal owner, and interested parties (if any) from the DMV. See the DMV’s detailed  discussion on its website for the remainder of the steps and forms to use when conducting a lien sale for a vehicle valued at $4,000 or less, which includes the steps on how to post the sale notice, what happens if someone opposes the sale, how to calculate the sale date, and how to handle the reporting of the sale of the vehicle.

When a vehicle valued at $4,000 or less is sold at a lien sale, there are no redemption rights.

Disposition of Lien Sale Proceeds

The  proceeds realized from the lien sale get distributed as follows:

  1. To the applicant of the lien sale in the amount necessary to discharge the lien and the cost of selling the vehicle, which actual  cost shall not exceed $70 for each vehicle valued at $4,000 or less, or $100 for each vehicle valued over $4,000.
  2. The balance, if any, to DMV within 15 days of any sale conducted for a vehicle valued over $4,000, or within 5 days of any sale conducted for a vehicle valued at $4,000 or less.
  3. Any person claiming an interest in the funds forwarded to the DMV may file a claim with the DMV within 3 years of the date that the DMV receive the funds.

Removal of Vehicles to Garages by Law Enforcement Authorities

The California Vehicle Code gives law enforcement authorities (and, in some limited circumstances, private parties) the right to remove vehicles to garages or other places of safety under various circumstances.

CAUTION

Regarding Obtaining Proper Notices: In order to protect a dealer’s lien rights, the dealer should be sure to give all notices required to be given under the Vehicle Code sections mentioned above.

There are other sections in the Vehicle Code that deal with removal of vehicles by law enforcement authorities for impoundment and which provide for the rights of registered and legal owners of the vehicle which are different from the laws in the Civil Code regarding labor and material liens on vehicles.

Personal Property in Vehicle

A lien that arises from work or storage on a vehicle does not attach to personal property in the vehicle.

Personal property in the vehicle must be returned to the owner upon demand.

If the vehicle goes to lien sale and the customer does not claim his or her personal property, a dealer should properly store the property to avoid future claims or lawsuits regarding the loss of such personal property.

Frequently Asked Questions

If a customer owes a dealer for work on another vehi­cle or for other services, can a dealer hold his or her present vehicle for those debts?

No, the lien attaches only to the vehicle on which the dealer  has worked or stored, and for which the bill remains unpaid.

Can the dealer remove anything the dealer has supplied to or installed on the vehicle when, for example, the legal owner repossesses it?

No.  For statutory liens that arise under Civil Code section 3068, that section specifically provides: Upon completion of the work or services, the lienholder shall not dismantle, disengage, remove, or strip from the vehicle the parts used to complete work or services.

What does a dealer do if the dealer has let the lien lapse for failure to take action within 30 days after the bill has been presented, or 15 days after the work or services are completed, whichever occurs earlier? Can the dealer continue to hold the vehicle?

The dealer has a problem at this point. If the dealer can negotiate an amicable settlement with a customer, the dealer should do so. Otherwise, it appears that the dealer must return the vehicle to the customer and sue him or her for the amount owing. If the dealer has a signed repair order with an attorney’s fees clause, the dealer will have the right to recover attorney’s fees in the lawsuit. Note however that if a dealer includes such a clause in the repair order, a customer could recover attorneys fees against the dealer in a breach of contract lawsuit relating to the repairs. If the dealer’s repair order also has language in it giving the dealer the right to retain possession until paid, the dealer could retain the vehicle, but a dealer would not have a lien on it and would not be able to transfer title through a lien sale. In this situation, it would be best to check with legal counsel in order to obtain an attachment lien or judgment lien against the property through litigation, later enabling the dealer to sell it and pass title.

Also, a properly drafted consensual lien in the dealer’s repair order might give the dealer the right to hold the vehicle and foreclose on the consensual lien by a court action.

If a dealer continues to hold the vehicle when the dealer has no legal right to do so, the dealer may be subject to a lawsuit for conversion of property in which a claim for all damages suffered could be alleged against the dealer, including possible punitive damages. If there is any doubt in this area, a dealer should consult with an attorney to prevent exposure to a possible large claim.

If a dealer thinks it may have a lien for storage, the dealer should consult with an attorney because the storage liens as set forth in this Chapter can be quite complicated.

Can the dealer purchase the vehicle at the lien sale?

Yes, the dealer may bid on the vehicle just as anyone else, but the sale must be “commercially reasonable.”

Can a dealer accept sealed bids at the lien sale?

No, the law specifically states that sealed bids shall not be accepted

What if someone other than the registered or legal owner, or lessor, authorizes repairs?

Then no lien arises. For example, repairs authorized by a thief who has stolen the vehicle do not give rise to a lien. If an authorized agent of the registered or legal owner, or lessor, authorizes the repairs, then a lien arises. A dealer should verify the identity of the registered owner, or lessor prior to accepting a vehicle for substantial repairs to insure the validity of a dealer’s lien.

Service Contracts

Overview

This chapter discusses the requirements of the California regulatory scheme applicable to vehicle service contracts.

Sections of the California Insurance Code define a “vehicle service contract” and provide that a vehicle service contract does not constitute insurance if certain requirements relating to licensing, form content, notices, cancellation rights and an insurance policy backing the service contract obligations are met. This regulatory scheme also incorporates sections of the California Civil Code which regulate service contracts.

CAUTION

Regarding Confirming Program Compliance. Before selling any vehicle service contract, a dealer should confirm that the applicable vehicle service contract program is legally compliant. A failure to confirm this legal compliance may expose a dealer to significant legal consequences.

Definition of Vehicle Service Contract

A “vehicle service contract” (“VSC”) is basically defined by statute as a contract or agreement (for a separately stated consideration and a specific duration of time) covering the repair, replacement or maintenance of a motor vehicle (or watercraft) resulting from an operational or structural failure due to a defect in materials or workmanship, or due to normal wear and tear. A VSC may provide for incidental payment under limited circumstances for towing, substitute transportation, emergency road service, rental car reimbursement, deductible amounts under a manufacturer’s warranty, and reimbursement for travel, lodging or meals.

A VSC may also include any of the following:

  1. an agreement for a term of at least one year, for separately stated consideration, that promises routine maintenance;
  2. an agreement that promises the repair or replacement of a tire or wheel necessitated by wear and tear, defect, or damage caused by a road hazard (defined by statute as a hazard encountered while driving that may include potholes, rocks, debris, metal parts, glass, plastic, curbs or composite scraps). Note that an agreement by a tire manufacturer to repair or replace a tire because of wear and tear, defect or damage caused by road hazard is exempt from the requirements applicable to a VSC. Such an exemption also applies to a warranty provided by a tire or wheel distributor or retailer where the warranty only covers defects in the material or workmanship of the tire or wheel;
  3. an agreement that promises the repair or replacement of glass on a vehicle necessitated by wear and tear, defect or damage caused by a road hazard. Note that a warranty provided by a vehicle glass or glass sealant manufacturer is exempt from the requirements that are applicable to a VSC. Such an exemption also applies to a warranty provided by a vehicle glass distributor or retailer where the warranty covers only defects in the material or workmanship of the vehicle glass;
  4. an agreement that promises the removal of a dent, ding, or crease without affecting the existing paint finish using paintless dent repair techniques, and which expressly excludes the replacement of vehicle body panels, sanding, bonding, or painting;
  5. an agreement that promises the replacement of a key or key fob when such an item is lost, stolen or becomes inoperable; or
  6. an agreement, with or without separate consideration, that promises to repair, replace or maintain (or indemnify for such items) a vehicle’s mechanical components conditioned upon “the use of a specific brand or brands of lubricant, treatment, fluid or additive.”
CAUTION

Regarding Other Indemnification Benefits: Dealers should be aware, however, that indemnification benefits included in a VSC providing for losses relating to misplacement, theft, collision, fire or other such perils are considered automobile insurance. Locksmith services (unless part of an emergency road service benefit) are also considered automobile insurance.

NOTE

Regarding Definitions of Motor Vehicles and Watercraft: A “motor vehicle” is defined by statute as “a self-propelled device operated solely or primarily upon land and may include both self-propelled motor homes or recreational vehicles, non-self-propelled camping and recreational trailers, off-road vehicles, and trailers designed to transport off-road vehicles.” The term “motor vehicle” does not include self-propelled vehicles with any of the following characteristics: (i) a gross vehicle weight rating of 30,000 pounds or more which does not meet the statutory definition of a recreational vehicle; (ii) is designed to transport more than 15 passengers, including the driver; or (iii) is used in the transportation of hazardous materials. The term “watercraft” basically means a ship of any kind that navigates from place to place and transports merchandise or persons and may include any non-self-propelled trailer used to transport such watercraft upon land.

Regarding VSC Coverage: It is a statutory requirement that a VSC cover items, costs or time periods not covered by an express warranty (an overlap with an express warranty is permitted) (see further discussion of this topic later in this chapter).

Who Can Sell A Vsc: A VSC may only be sold by a dealer or lessor retailer licensed in one of those capacities by the DMV who sells VSCs “incidental to his or her business of selling or leasing motor vehicles.” Dealers should be aware that the phrase “incidental to his or her business of selling or leasing motor vehicles” does not prohibit a dealer from selling a VSC which covers a vehicle not sold or leased by the dealer.

Regarding the description of service contracts: If a service contract is described as an “extended warranty,” a buyer may claim rights and remedies afforded a new car buyer against a manufacturer under the Song-Beverly Consumer Warranty Act (Lemon Law). Such a claim may also be supported if a service contract includes language referring to itself as a “warranty.” 

Types of VSCs

By statute various types of VSCs are deemed not to constitute insurance, including three types discussed below in detail which are differentiated based upon whether the party obligated to perform under the VSC is a third party (“Third Party Obligor”), dealer (“Dealer Obligor”) or manufacturer (“Manufacturer Obligor”). A Manufacturer Obligor VSC must only cover vehicles manufactured or distributed by that manufacturer.

NOTE

Regarding Other Types of Agreements: Other types of agreements not discussed in detail in this chapter which do not constitute insurance are: (1) agreements obligating a motor vehicle (or watercraft) parts distributor, manufacturer, or retailer to only repair or replace the part manufactured, distributed or retailed by that party and to possibly provide for consequential and incident damages resulting from failure of that part; (2) agreements relating to repair work previously performed by a repair facility which provide that the repair facility is obligated to repair or replace the part previously repaired and possibly for consequential and incident damages resulting from failure of that part; and (3)  agreements promising only routine maintenance that do not constitute a VSC.

Third Party Obligor VSC Program Requirements

With respect to a Third Party Obligor VSC program (where a third party other than the seller or manufacturer of the vehicle is the obligated party under the VSC), the following requirements must be met so that the VSC involved will not be considered automobile insurance:

License Requirement

  • The Third Party Obligor must be the holder of a “vehicle service contract provider license.” For disciplinary action purposes, this license is considered a property broker-agent and casualty broker-agent license with certain exceptions. Specifically the license applicant is not required to satisfy pre-licensing and continuing education requirements or to pass a qualifying exam.

Insurance Commissioner Filing Requirements

  • The Third Party Obligor must file the following with the Insurance Commissioner:
  1. The VSC agreement (form contract) to be used; and
  2. A copy of an insurance policy covering 100% of the VSC obligations which must be approved prior to any obligation being incurred under a VSC (see discussion of requirements applicable to the insurance policy later in this chapter).
NOTE

Regarding Indemnity Benefits: If a VSC agreement includes indemnity benefits relating to towing, substitute transportation, emergency road service, rental car reimbursement, deductible amounts under a manufacturer’s warranty or reimbursement for travel, lodging or meals, the Third Party Obligor must certify the indemnity benefits are incidental and this certification is subject to investigation by the Insurance Commissioner.

VSC Form Disclosures Requirements

The VSC agreement (form contract) to be used must contain the following disclosures:

  1. a notice that states “Performance to you under this contract is guaranteed by a California approved insurance company. You may file a claim with this insurance company if any promise made in the contract has been denied or has not been honored within 60 days after your request. The name and address of the insurance company is: (insert name and address). If you are not satisfied with the insurance company’s response, you may contact the California Department of Insurance at 1-800-927-4357 or access the department’s Internet Web site (www.insurance.ca.gov);”
  2. if the third party obligor has satisfied the California Insurance Commissioner that it or its parent company has a net worth of $100,000,000, in lieu of obtaining the required insurance policy, a notice that states “If any promise made in the contract has been denied or has not been honored within 60 days after your request, you may contact the California Department of Insurance at 1-800-927-4357 or access the department’s Internet Web site (www.insurance.ca.gov);”
  3. a conspicuous printing (in boldface type and no smaller than the surrounding type) of contract language which excludes coverage or imposes duties upon the purchaser (contract language excluding coverage for preexisting conditions must be in 12-point type);
  4. the Third-Party Obligor’s full corporate name or fictitious name approved by the Insurance Commissioner, mailing address, telephone number and vehicle service contract provider license number;
  5. a place to disclose the name of the purchaser and the name of the dealership (as the seller);
  6. a conspicuous disclosure of the VSC’s purchase price;
  7. the disclosures required by Civil Code section 1794.4, including a clear and conspicuous statement of the Third Party Obligor’s obligations under the VSC, any restrictions on the purchaser transferring or assigning the VSC, and a step by step explanation of the claims procedures (see further discussion of these disclosures later in this chapter);
  8. the purchaser’s cancellation and refund rights as required by Civil Code section 1794.41(see further discussion of these rights later in this chapter); and
  9. the name of the service contract administrator, if any, and the administrator’s license number.
NOTE

Regarding Department of Insurance Website: The requirement that a VSC agreement include a reference to the Department of Insurance Website is not applicable if the Department issued a “no objection letter” regarding the form as of December 31, 2016.

NOTE

Regarding “Service Contract Administrator”: A “service contract administrator” is defined by statute to mean any person, other than a person obligated on the VSC, who performs or arranges, directly or indirectly, the collection, maintenance, or disbursement of monies to compensate any party for claims or repairs pursuant to a VSC and who is involved in providing service contract forms and adjustments of claims. Dealers participating in service contract programs that utilize a service contract administrator should confirm that the service contract administrator is licensed as a property broker-agent and casualty broker-agent.

Record Requirements

The Third-Party Obligor or its service contract administrator must maintain accurate accounts, books and records of all transactions and make them available to the Insurance Commissioner on reasonable request.

NOTE

Regarding Required Records: Any computerized record-keeping system must be capable of producing legible hard copies of a complete set of accounting records, including but not limited to a general ledger, cash receipts and disbursements journals, accounts receivable and accounts payable registers, copies of each type of VSC sold, the name and address of each VSC purchaser, a list of locations where the VSCs are marketed, sold or offered for sale, and written claims files which contain the dates and descriptions of the claims related to the VSCs. These records must be maintained for at least three (3) years after the expiration of a VSC and also must be accessible to an insurance company that has issued the policy backing the VSC obligations. A failure to maintain these records is grounds for suspension or revocation of the obligor’s vehicle service contract provider license and also is grounds for a cease and desist order.

Dealer Obligor VSC Program Requirements

Regarding Dealer Obligor VSC Programs (where the dealer is the party obligated under the VSC), the Dealer Obligor must comply with all of the requirements applicable to a Third Party Obligor VSC program, as discussed previously in this chapter, except that the Dealer Obligor is not required to obtain a vehicle service contract provider license.

Manufacturer Obligor VSC Program Requirements

If a dealer intends to sell VSCs under a Manufacturer Obligor VSC program (where a motor vehicle manufacturer or distributor is the obligated party under the VSC which covers only vehicles manufactured or distributed by that party), the dealer should confirm the program is in compliance with all of the legal requirements applicable to a Third Party Obligor VSC program, as discussed previously in this chapter. It should be noted however, that the Manufacturer Obligor is not required to obtain a vehicle service contract provider license or file an insurance policy with the Insurance Commissioner.

Insurance Policy Requirements for Third Party and Dealer Obligor VSC Programs

The insurance policy that is required to back a Third-Party Obligor (other than a manufacturer) VSC program or a Dealer Obligor VSC program is subject to the following requirements:

  1. the policy must be issued by an insurance carrier admitted in the State of California and authorized to issue such insurance or a risk retention group (“RRG”) qualified under federal law and in good standing and registered with the Insurance Commissioner;
  2. the insurance company or RRG involved must have and continue to have at all times an A.M. Best Company, Inc., rating of B++ or better and maintain surplus as to policyholders and paid-in capital of at least $15,000,000 (this limit can be $10,000,000 if the insurance company or RRG maintains a ratio of direct written premiums to surplus as to policyholders and paid-in capital of not more than 3 to 1); and
  3. the insurance company or RRG involved must annually file audited financial statements.

NOTE

Regarding Cancellation of Insurance Policy Backing VSC Program: A party obligated under a VSC may only have one active insurance policy at a time on file with the Insurance Commissioner. If the insurer cancels that policy, the obligor named in the policy must either obtain a new policy before the termination of the prior policy or discontinue any sale of VSCs until a new policy is effective and has been accepted by the Insurance Commissioner.

Regarding Net Worth Requirement In Lieu Of Insurance Policy: A Third Party Obligor or a Dealer Obligor may establish to the Insurance Commissioner’s satisfaction that it or its parent company has a net worth of $100,000,000, in lieu of providing the required insurance policy. To satisfy this net worth requirement, financial statements and affidavits attesting to the net worth of the obligor or the obligor’s parent company must be submitted to the Insurance Commissioner. If the parent company is the entity satisfying the net worth requirement, it will be required to guarantee, in writing, the obligations of the obligor relating to the VSCs issued by the obligor in California.

Criminal Penalties

Any VSC obligor or administrator failing to comply with the licensing and insurance policy requirements is guilty of a criminal offense punishable by imprisonment in a county jail or by a fine not exceeding $500,000, or both. This statute is not applicable to a dealer who is the obligated party under a VSC.

CAUTION

Regarding Dealer Compensation Based on Adjustment of Claims: A dealer who sells VSCs and participates in or influences, directly or indirectly, the process, administration, or adjustment of claims is prohibited from entering into any agreement which makes the amount of the dealer’s commission or compensation contingent upon savings affected by the adjustment, settlement or payment of losses covered by the VSC.

NOTE

Regarding Burden of Proof on Claims: It is the burden of the obligated party to prove that a claim is not covered by a VSC and that any claim settlement amount is a proper amount.

Civil Code Section 1794.4 VSC Disclosures

VSCs are required by law to fully and conspicuously disclose in simple and readily understood language the terms, conditions and exclusions of the contract, including the following information:

  1. A clear description and identification of the motor vehicle.
  2. The VSC’s start date and period of coverage measured by elapsed time or mileage.
  3. A description of any limits on the transfer or assignment of the VSC.
  4. A statement of the general obligation regarding services and parts to be provided by the party obligated under the VSC without additional charge, to allow the proper operation of the motor vehicle by the VSC purchaser, with clear and conspicuous statements of the following:
    1. any services, parts, characteristics, components, properties, defects, malfunctions, causes, conditions, repairs, or remedies that are excluded from the scope of the VSC.
    2. any limit on the services and parts (necessary to maintain the normal operation of the motor vehicle) to be provided without additional charge.
    3. any additional services that will be provided.
    4. whether preventative maintenance will be provided, and, if so, the nature and frequency of that preventative maintenance.
    5. whether the VSC purchaser has an obligation to provide preventative maintenance or perform any other obligations, and, if so, the nature and frequency of those obligations, and the consequences of any noncompliance.
    6. a step-by-step explanation of the claims procedure under the VSC, including the following information:
      • the full legal and business name of the party obligated under the VSC;
      • the mailing address of the party obligated under the VSC;
      • the persons or class of persons authorized to perform service under the VSC;
      • the name or title and address of anyone responsible for the performance of any obligations under the VSC;
      • the method the VSC purchaser must use to give notice to the party obligated under the VSC of the need for service;
      • if the motor vehicle must be transported for service or repair, whether the VSC will cover that transportation cost and either the place where the motor vehicle should be delivered or a toll-free number the VSC purchaser may call to obtain that information;
      • all other steps that the VSC purchaser must take to obtain service; and
      • all fees, charges and other costs that the VSC purchaser must pay to obtain service.
    7. an explanation of the steps that will be taken by the party obligated under the VSC to provide the benefits of the VSC.
    8. a description of any right to cancel the VSC if the motor vehicle is returned, sold, lost, stolen, or destroyed or if such a right does not exist or is limited, a statement of that fact.
    9. Information regarding the availability of any informal dispute settlement process.

Civil Code Section 1794.41 VSC Requirements and Cancellation Rights

Other legal requirements applicable to VSCs include the following:

  1. The VSC must be available for inspection by the VSC purchaser prior to purchase and either the contract or a brochure specifically describing the terms, conditions, and exclusions of the VSC, and the provisions relating to contract delivery, cancellation and refund must be delivered to the VSC purchaser at or before the time of the VSC purchase. Within 60 days after the date of purchase, the VSC itself must be delivered to the VSC purchaser.
  2. The VSC must be applicable only to items, costs and time periods not covered by the express warranty (there may be an overlap with the express warranty, if the VSC covers items or costs not covered or provides relief not provided for by the express warranty).
  3. The VSC must be cancelable by the VSC purchaser under the following conditions:
    1. With respect to a new motor vehicle, within the first 60 days of the receipt of the VSC (within 30 days for a used motor vehicle), and if the VSC purchaser provides written notice of cancellation and no claims have been made, the VSC purchaser is entitled to a full refund.
    2. If a claim has been made within the first 60 days (within 30 days for a used motor vehicle), the refund is calculated pro rata based on either elapsed time or mileage at the obligated party’s option.
    3. Any cancellation that occurs after the first 60 days (30 days regarding a used motor vehicle) results in a refund to the VSC purchaser calculated pro rata based on either elapsed time or mileage (again at the obligated party’s option).
    4. If the cancellation occurs after the period during which a full refund is available, a cancellation or administrative fee may be assessed to the VSC purchaser which does not exceed 10% of the VSC price or $25, whichever is less.
    5. If the VSC was financed, the refund may be payable to the VSC purchaser or the lender of record or both.

Obligor’s Right to Cancel VSC

Any party obligated under a VSC may include a provision that reserves the right for that party to cancel the VSC if the following requirements are met:

  1. the notice of cancellation is mailed to the VSC purchaser postmarked before the 61st day after the date the VSC was sold.
  2. the obligated party provides the VSC purchaser with a refund equal to the full purchase price stated on the VSC within 30 days from the date of cancellation. If a claim has been paid or will be paid, the refund may be provided on a pro rata basis less the amount of any claims paid prior to cancellation.
  3. the VSC ceases to be valid no less than 5 days from the postmark of the cancellation notice.
  4. the notice states the specific grounds for cancellation.

A VSC may be cancelled by the obligated party based on a failure of the VSC purchaser to pay, if a notice of cancellation stating the specific grounds for cancellation is mailed to the VSC purchaser, and any refund owed pursuant to Civil Code § 1794.94 is paid within 30 days of cancellation date (this date may be no less than 5 days from the postmark date of the notice). A VSC may also be cancelled by the obligated party based upon material misrepresentation or fraud by the VSC purchaser, if a cancellation notice disclosing the specific nature of the misrepresentation is mailed to the VSC purchaser and a pro rata refund is paid within 30 days of the cancellation date.

CAUTION

Regarding Claims Made Prior to Cancellation: Any obligated party cancelling a VSC is liable for claims covered by the VSC which are reported prior to the effective date of cancellation. A claim is considered reported if the VSC purchaser has completed the first step required under the VSC for reporting the claim.

VSC Refund Agreements

Promises made to refund some or all of the purchase price of a VSC under conditions where no claims are made, there is a limited number of claims made, or the dollar amount paid on claims does not exceed a set amount or percentage, are not considered insurance if the following requirements are met:

  1. The promise is offered without separate consideration;
  2. The promisor is one of the following and satisfies the applicable requirements:
    1. The promisor is obligated under the VSC, the refund promise is part of the VSC, and the promisor has complied with the statutory requirements applicable to the type of VSC program involved as discussed previously in this chapter.
    2. The promisor is a dealer and the refund agreement provides no benefits other than a refund of some or all of the VSC purchase price and the dealer uses a “refund agreement administrator” (defined as a person other than the dealer who performs or arranges the collection, maintenance or disbursement of monies under a refund agreement and provides dealers with refund agreement forms and participates in the adjustments of refund agreement claims). To be a refund agreement administrator, a person must be licensed as a property broker-agent and casualty broker-agent and comply with other requirements which are basically equivalent to those applicable to a Third Party Obligor VSC program as discussed previously in this chapter. Those requirements include filing a copy of the refund agreement with the Insurance Commissioner; having the refund agreement include certain notices and disclosures; filing an approved insurance policy with the Insurance Commissioner covering 100% of the refund agreement obligations; and maintaining records relating to refund agreement transactions.
    3. If the promisor under the refund agreement is neither a dealer nor a party obligated under the VSC, the promisor is deemed a “refund agreement obligor.” A “refund agreement obligor” must be licensed as a property broker-agent and casualty broker-agent and comply with other requirements which are basically equivalent to those applicable to a Third Party Obligor VSC program as discussed previously in this chapter. Those requirements include filing a copy of the refund agreement with the Insurance Commissioner; having the refund agreement include certain notices and disclosures; filing an approved insurance policy with the Insurance Commissioner covering 100% of the refund agreement obligations; and maintaining records relating to refund agreement transactions.
CAUTION

Regarding Benefits of Refund Agreement: A refund agreement obligor may not promise any benefit other than a refund of all or some of the VSC purchase price.

NOTE

Regarding Who Can Offer Refund Agreements: No person other than a dealer is authorized to provide or offer to provide a refund agreement to a VSC purchaser.

NOTE

Be familiar with contract terms: There have been occasions where California dealers found themselves liable under thousands of vehicle service contract refund agreements when the insurance company backing the agreements was forced into liquidation. As a result, dealers should carefully review all aspects of a program offering service contract refund agreements before participating.

New and Used Car Warranties

Overview

This chapter explains the various laws governing vehicle warranties and offers methods to limit liability by having the manufacturer assume the burden of customer claims under these laws where applicable. This chapter also includes an analysis of the Fed­eral Trade Commission (FTC) Used Car Rule.

Scope and Purpose of Major Warranty Statutes

There are three sources of warranty law – the California Commercial Code, the Song-Beverly Consumer Warranty Act and the federal Magnuson Moss Act.

Definition of Warranty

In its most basic sense a warranty is a representa­tion with backbone: the seller will have to make the buyer whole if the representation turns out to be false, regardless of how careful the seller was in making sure the representation was true. For many years, even before warranties were delivered with consumer products, legal rules took shape concerning what turns a representation into a warranty. Questions were raised and answered as to whether sim­ply offering a product for sale carried with it certain implied warranties, whether advertising statements could be considered express warranties, whether a manufacturer could be held liable under one or more warranty claims even though it never had a contract with the ultimate consumer, and many other matters.

In the sale of vehicles, and other consumer prod­ucts, the emergence of manufacturers’ warranties skewed the meaning of the word warranty toward more of a promise to repair certain problems, ex­cepting only those caused by certain unexpected events, such as an accident. Likewise, additional laws were passed which dealt with consumer warranties, covering such things as the format and pre-sale availability of the warranty document, what can be included in the document for the warrantor’s benefit, and permissible warrantor conduct in performing its warranty obligations, with penalties for failing to abide by the rules.

For the auto dealer, the layering of these develop­ments over the years has resulted in a patchwork of laws and regulations which is very difficult to sort out.

Generally, warranty law flows from three sources: the California Uniform Commercial Code, (“UCC” or “Commercial Code”), the Song-Beverly Consumer Warranty Act contained in the California Civil Code (“Song-Beverly”) and the federal Magnuson-Moss Warranty Act (“Magnuson-Moss”).

California ­Commercial Code War­ranties

The UCC covers the sale of all goods, both at wholesale and retail. It contains technical rules regarding warranties, but they are very broad in their scope. Song-Beverly and Magnuson-Moss are consumer based warranty laws, but often borrow from the UCC, and impose rules limiting the “waiveability,” of warranties which might pertain to the transaction, including UCC warranties.

The UCC defines the meaning of express warranty and defines two types of implied warranties – the implied warranty of merchantability and the implied warranty of fitness for a particular purpose.

Unlike Song-Beverly and Magnuson-Moss which deal only with retail consumer sales, the UCC warranties apply to all sales, even commercial sales and dealer trades.

How oral statements and advertising materials may come to be regarded as express warranties is governed by the UCC, whereas the provisions of Song-Beverly and Magnuson-Moss apply only to written warranties where a direct promise is made to cause the vehicle to perform, or conform to a standard.

UCC Implied Warranty Of Merchantability

Under the Commercial Code, and insofar as an automobile dealer is concerned, the implied war­ranty of merchantability simply means that there shall be implied in every contract for the sale of an automobile that the vehicle being sold is of merchantable quality (i.e. that at the time of sale it is fit for the ordinary purposes for which a vehicle is used).

The implied warranty of merchantability arises in every contract of sale so it applies to both new car and used car sales.

What is meant by “merchantable” varies with the type of product sold and is to a large extent, except as modified by statute, controlled by the base minimum level of function that satisfies the public’s reasonable expectations in connection with an auto­mobile purchase. A new car to be merchantable should be in a condition at the time of sale where it can be expected to be free from significant defects for the duration of the factory warranty, if not longer; whereas a used car depending on the mileage will be held to a lesser standard. The higher the mileage, the lesser the reasonable expectations, and the lower the standard by which the vehicle can be judged;  provided, of course, that the vehicle is ac­tually useable for transportation at the time of sale.

UCC Implied Warranty of Fitness For A Par­ticular Purpose

The Commercial Code defines the implied warranty of fitness for a particular purpose, also called “fitness for use.” If the seller knows or should know at the time of the sale that the buyer has a particular or special purpose for which the vehicle is required, and knows or should know that the buyer is and will be reasonably relying on the seller’s skill or judgment to select a suitable vehicle, an implied warranty that the vehicle is fit for such purpose will be deemed to exist. For example, if a purchaser advises a dealer that he or she is interested in a vehicle which can tow a boat or trailer to the mountains and relies upon the advice of the salesperson to pick the vehicle suitable for that pur­pose, an implied warranty arises in favor of the customer that the vehicle will be suitable for that purpose.

Thus, the implied warranty of fitness is based on communications taking place between the dealer and customer. Those same communications can also form the basis of an express warranty. Under many circumstances, an express warranty survives attempted disclaim­ers contained in the contract. It is therefore very important that sales personnel refrain from making any exaggerated assertion of fact about the quality of the product being sold, and where the sale does involve special reliance on the ex­pertise of the seller, the contract should spell out in writing the precise special representations that were being made.

UCC Express Oral and Written Warranties

The Commercial Code provides that an express warranty is created whenever any affirmation of fact or promise relating to the goods being sold becomes part of the basis of the bargain. Under such a warranty, the goods must conform to the affirmation or promise. To be part of the basis of the bargain means that the affirmation of fact or promise is made part of the terms of the purchase and sale agreement. Contrast this to “puffing statements” by the salesperson that do not constitute a warranty.

CAUTION

Oral Representations: While certain oral representations made by salespersons will not constitute an express warranty under the Commercial Code , such representations may, if untrue, result in a violation of the Consumers Legal Remedies Act as well as the Unfair Competition Law . This is especially problematic in connection with mileage claims for electric vehicles. Ensure that dealership personnel convey only what has been clearly communicated by the manufacturer in writing regarding mileage estimates.

Waiving and Disclaiming Warranty Rights Under the UCC

Subject to the limitations discussed below, the implied warranties under the UCC may be dis­claimed, and remedies for breach of both implied and express warranties may be limited. Examples of proper limitations include disclaiming all warranties, written or oral, best accomplished by an unmistakable “as-is” statement separately signed on the front of the contract, or, where a warranty is given, limit­ing the buyer’s remedy to having the vehicle repaired only, thus eliminating any other potential claim for damages. As explained below, Song-Beverly Magnuson Moss, and (as to certified used vehicles), the Car Buyers Bill of Rights, drastically curtail the rights of the seller to disclaim or limit the buyer’s warranty rights and remedies. Where these statutes do not apply, however, the method of disclaimer is the same with respect to both new and used cars and will be discussed in more detail in connection with used car sales where the dis­claimer has the most significance to a dealer.

California Song-Beverly Consumer Warranty Act

Unlike the UCC, the Song-Beverly Consumer Warranty Act only applies to the sale of consumer goods (including vehicles with gross vehicle weight ratings of under 10,000 pounds) bought for use primarily for personal, family, household, or for business purposes (so long as the business has no more than five vehicles registered to it). Song-Bev­erly deals not only with motor vehicles, but also other consumer goods, including parts and accessories.

Generally speaking, Song-Beverly does the follow­ing:

•  extends the implied warranty of merchantability

•  makes it more difficult to disclaim the implied warranty of merchantability;

•  makes more definite the duration of the implied warranties;

•  provides for the extension of warranties while a vehicle is being repaired;

•  provides for a right of indemnity in favor of the dealer against the manufacturer;

•  provides for various notices to the buyer regard­ing the buyer’s rights under warranties; and

•  strengthens the buyer’s remedies in case of a breach of warranty to include in addition to all of the UCC remedies a right to treble damages for a willful breach.

Federal Magnuson-Moss Warranty Act

Like the Song-Beverly Act, the Magnuson-Moss Warranty Act does not mandate that a manufacturer or dealer provide or offer any warranty. Magnuson-Moss states that if a dealer issues a written warranty with a vehicle being sold, or if a dealer enters into a service contract concerning the vehicle as an obligor, then certain requirements pertain to the transaction.

Magnuson-Moss mandates certain disclosures be contained in any written warranty, and prohibits those who issue express warranties or who, as the obligor, enter into service contracts from disclaiming implied warranties, although in those circumstances implied warranties may be limited by agreement to the dura­tion of the written warranty. These requirements apply only to the party who “actually makes” the warranty or enters into a service con­tract as an obligor (although some plaintiffs’ attorneys have attempted to argue that a dealer might be deemed an obligor under a service contract even if not shown as such on the contract itself depending on the role the dealer plays in furnishing the necessary parts and labor and bearing the risk of loss of claims). The FTC agrees that if the manufacturer ac­tually makes the warranty, and the dealer “does no more than distribute or sell a consumer product covered by a written war­ranty offered by [the manufacturer] and which iden­tifies [the manufacturer] as the warrantor,” the dealer has legally made no warranty under Magnuson-Moss.

Magnuson-Moss requires that written warranties meet stringent standards regarding their content, and that they be labeled and referred to either as either a “full warranty” or “limited warranty.” All manu­facturer’s warranties are limited warranties and any written warranty a dealer would be giving should be a limited warranty. A dealer is therefore ob­ligated to use that terminology in referring to any such warranties in sales, advertising, or other com­munication with customers. Never use the term “full warranty.”

Magnuson-Moss also contains pre-sale availabil­ity rules requiring any warranty that accompanies the vehicle to be available for review by potential buyers. Dealers must make the entire text of written warranties available to consumers, by prominently displayed signs advising of availability or by placing the warranty’s terms in close proximity to the vehicle.

Magnuson-Moss applies to written warran­ties on products which are normally used for per­sonal, family or household purposes. The term “normally used” is interpreted by the FTC merely to mean that a personal, family or household use of the product being sold is not uncommon. Under this interpretation, most every passenger car and light–duty pick-up truck would be covered by the Act. Any consumer may enforce the provisions of the Act, and the FTC also interprets the term consumer very broadly to include both businesses and individuals. Only a small class of purchasers would not come under the Act, such as persons purchasing solely for resale.

New Car Warranty Issues

Implied Warranties

Since a dealer rarely, if ever, makes an express written warranty in connection with a new car sale, the primary concern is when and how a dealer is liable for the implied war­ranty of merchantability if, for some reason, the dealer cannot or does not disclaim it (e.g., where a dealer is the obligor under a service contract entered into with the buyer within 90 days of purchase).

Under the ­Commercial Code

A dealer is deemed by law to make an implied warranty of merchantability to the customer under the UCC on every new car sale unless is disclaimed.

A dealer can disclaim this implied warranty by a con­spicuous writing (it can even be on the back side of the contract) which states that there is no implied warranty of merchantability accompanying the sale. Conspicuous is defined by the Code as “so written that a reasonable person against whom it is to oper­ate ought to have noticed it….”

Language in the body of a form is “conspicuous” if it is in larger or contrasting type or color. Most conditional sale contract forms contain a disclaimer on the back side in larger type than the other printing and some use a ­contrasting color, but a dealer should be absolutely certain that the contract form used has a conspicuous disclaimer. A dealer can also disclaim by the use of the words “as is” or “with all faults” and although the Code does not specifically say that these words must be conspicuous, there can be little doubt that the courts would read in such a require­ment.

Under Song-Beverly

Song-Beverly provides that every sale of a new motor vehicle (or other new consumer goods) is deemed to be ac­companied by the implied warranty of merchant­ability of the manufacturer and the retail seller. However, it also states that “the retail seller shall have a right of indemnity against the manufacturer in the amount of any liability under this section.”

Thus on every new car sale that a dealer makes for personal, family, household, or small business purposes as discussed under the heading “Under the Lemon Law,” the dealer will be held responsible jointly with the manufacturer for the implied warranty of merchantability with a right of indemnity against the manufacturer.

In consumer sales under Song-Beverly, a dealer cannot disclaim the implied warranty of merchantability if an express warranty “is given” – presumably by either the dealer or by the manufacturer, nor can a dealer disclaim an implied warranty on a new vehicle without strictly following Song-Beverly’s stringent “as-is” documentation requirement – a requirement that mandates stating that absolutely no warranty of any kind (and from any source) covers the goods. In practical terms, therefore, a dealer cannot disclaim implied warranties in consumer sales of new vehicles when sold, as most are, with manufacturer warranties.

Song-Beverly provides that the duration of its implied warranty of merchantability on a new car shall be coextensive in duration with any express warranty which accompanies the sale, but in no event shall the duration be less than 60 days nor more than one year.

Under the Lemon Law

One component of Song-Beverly, the Tanner Con­sumer Protection Act, known by most as the “Lemon Law,” applies only to new motor vehicles. “New Motor Vehicle” means a new motor vehicle that is bought or used primarily for personal, family, or household purposes. “New Motor Vehicle” also means a new motor vehicle with a gross vehicle weight under 10,000 pounds  that is bought or used primarily for business purposes by a person, including a partnership, limited liability company, corporation, association, or any other legal entity to which not more than five motor vehicles are registered in this state.

“New motor vehicle” includes the chassis, chassis cab, and that portion of a motor home devoted to its propulsion, but does not include any portion designed, used or maintained primarily for human habitation. Also included are dealer-owned vehicles, demonstrators or other motor vehicles sold with a manufacturer’s new car warranty, but not motorcycles or unregistered motor vehicles to be used exclusively off the highways.

Except for a member of the Armed Forces, the Lemon Law has also been limited to vehicles sold in California. The California Supreme Court has held that a California resident who buys a car in another state and has it repaired repeatedly in California is not entitled to refunds or damages under California’s Lemon Law. The Court emphasized that the warranty law only covers “goods sold in California.” In the case of a member of the Armed Forces, the Lemon Law applies to vehicles purchased regardless of which state his or her motor vehicle is purchased or registered if the member of the Armed Forces was stationed in or a resident of California at the time (1) he or she purchased the motor vehicle or (2) at the time he or she filed an action pursuant to the Lemon Law.

The Lemon Law affirma­tively requires the manufacturer to either replace the vehicle or refund the customer’s money, at the customer’s option, when a material problem with the vehicle cannot be remedied after a reasonable number of repair at­tempts. To be material, the problem must substantially impair the use, safety, or value of the vehicle.

The Lemon Law’s Definition of New Vehicle

California courts have interpreted the definition of a “new vehicle” under the Lemon Law to include any motor vehicle, even a used car, sold with remaining manufacturer’s new car warranty coverage.

Reasonable Number of Attempts Presumption

Under the Lemon Law, the customer, including both buyers and lessees, enjoy a presumption that a reasonable number of attempts have been made to conform a new motor vehicle to the applicable express written warranties, triggering the duty of the manufacturer to replace or buy-back the vehicle, if, within eighteen (18) months from delivery to the buyer or 18,000 miles on the odometer of the vehicle (whichever occurs first), one or more of the following occurs: (1) the same nonconformity results in a condition that is likely to cause serious bodily injury if the vehicle is driven, the nonconformity has been subject to repair at least twice by the manufacturer or its agents, and the buyer or lessee has at least once directly notified the manufacturer of the need for repair of the nonconformity; (2) the same nonconformity has been subject to repair four or more times by the manufacturer or its agents, and the buyer has at least once directly notified the manufacturer of the need for repair of the nonconformity; or (3) the vehicle has been out of service for a cumulative total of more than thirty (30) calendar days since its delivery to the buyer.

Even though this presumption can be overcome by other evidence, if the manufacturer fails to meet its burden of overcoming the presumption, it might be held to have willfully violated the Lemon Law, thus subjecting itself to Lemon Law penalties.

The presumption, however, may not be asserted if a qualified third-party dispute resolution process exists, until after the customer has resorted to the third-party process. The manufacturer must be bound by the decision of the third-party process, but if the customer is dissatisfied with the decision, the findings and decision of the third party process will without further foundation be admissible in any legal action brought by the customer. The Act sets forth the qualification requirements for a third-party dispute process, one of which is that it be certified by the Department of Consumer Affairs.

Where the manufacturer or its representative has been unable to repair the vehicle to conform to the applicable warranties after a reasonable number of attempts as defined in the Act, it must replace the vehicle or refund the purchase price. There is no requirement that the buyer seek to “rescind” the purchase. In either instance, the buyer is also entitled to all incidental expenses, including, but not limited to, reasonable repair, towing, and rental costs incurred, reasonable attorney’s fees where suit was required to enforce the provisions of the Lemon Law, and under certain conditions, civil penalties equal to twice the amount of any damages. If the customer elects to take a replacement vehicle, the manufacturer is entitled to deduction for such use. In either instance, the amount attributable to use by the buyer is determined by multiplying the actual price of the new motor vehicle paid or payable by the buyer by a fraction having as its denominator 120,000 and having as its numerator the number of miles traveled by the new motor vehicle prior to the time the buyer first delivered the vehicle to the manufacturer or distributor or its authorized service and repair facility, for correction of the problem that gave rise to the nonconformity.

Lemon Law Penalties

In addition to a refund or replacement, the customer may claim a civil penalty not to exceed two times the actual damages, which is added on top of the actual damages (thus possibly allowing a verdict equal to three times the actual damages).Penalties are available under two potential triggers.

The first applies if the manufacturer’s failure to repair or replace was “willful.” This does not apply to a claim based solely on a breach of an implied warranty.  Willfulness will not exist where the factory has a good faith and reasonable belief that the customer’s case is not supported by the facts.

The second requires no willfulness, and applies if after the presumption is established (based upon one of the triggering events occurring within 18 months/18,000 miles), the buyer shows that the manufacturer has no qualified third party dispute resolution process (as most do not), or the buyer sends a written demand for repair or replacement and the manufacturer does not comply within 30 days.

Lemon Law Damages

In addition to vehicle replacement or full refund, a customer may recover incidental damages for Lemon Law violations. Those damages are limited to monetary losses actually incurred, and do not include emotional distress damages, even if the violation was willful. In determining the amount of monetary losses actually incurred by a customer electing the refund remedy under Song-Beverly, a buyer may recover all paid finance charges from the manufacturer.

Lemon Law Reacquisition Agreements

Song-Beverly prohibits gag clauses regarding the problems experienced with the vehicle in Lemon Law settlement agreements. Specifically, the law states that any automobile manufacturer, importer, dealer, distributor, or lienholder who takes back a vehicle, or assists in requiring a vehicle, is prohibited from requiring that a buyer or lessee agree not to disclose the problems with the vehicle or the non-financial terms of the reacquisition. The law further prohibits including a gag clause, confidentiality clause or similar clause in any release or other agreement, whether prepared by the manufacturer, importer, distributor, dealer or lienholder, which would prohibit the buyer or lessee from disclosing information to anyone about the problems with the vehicle or the non-financial terms of the reacquisition. Any such gag or confidentiality clause in violation of Song-Beverly is null and void as against the public policy of California. The statute is not intended to prevent any confidentiality clause, gag clause, or similar clause regarding the financial terms of the reacquisition of the vehicle.

Lemon Law and Recreational Vehicles

It had been widely assumed that the Lemon Law does not apply to the coach portion of a motorhome, nor to non-motor vehicle recreational vehicles, like travel trailers. This was because Song-Beverly’s vehicle Lemon Law provisions excluded, by name, the coach portion of motorhomes from the definition of “new vehicle.” However, Song-Beverly contains a “Lemon Law” that applies to non-vehicle consumer goods as well. This applies to the coach portion of recreational vehicles, while the vehicle Lemon Law applies to the chassis.

Dealer Indemnity Rights – Song-Beverly

Some manufacturers strenuously oppose breach of warranty claims. In suits where both the dealer and manufacturer are named defendants, the manufacturer is often been recalcitrant about settling, and all too frequently tries to pressure the dealer to contribute toward settlement.

Not only does Song-Beverly specifically provide for indemnity in favor of the dealer against the manufacturer, it goes further and prescribes the conditions under which the manufacturer must (without any dealer contribution or duty) replace the customer’s car or refund the full purchase price to the customer, less an offset for use.

With the law specifically providing that a manufacturer (and not the dealer) has the duty to replace the vehicle or refund the customer’s purchase price at the option of the buyer when the vehicle cannot be repaired after a reasonable number of attempts, it is incumbent on the manufacturer to more actively participate in solving customer complaints. Furthermore, with its added vulnerability at the trial level, the manufacturer should be required to more actively purse settlement of the really troublesome cases without any reasonable expectation of a dealer contribution.

Dealer Indemnity Rights – Vehicle Code

In addition, the Vehicle Code also mandates that manufacturers indemnify their dealers for liability and reasonable costs (including attorney fees) arising out of customer or other third party claims against the dealer based the condition or design of the vehicle or parts or on any service systems or procedures required or recommended to the dealer by the manufacturer.

Under Magnuson-Moss

Magnuson-Moss does not impose or mandate its own implied warran­ties. If a new car sale is covered by Song-Beverly, that is, the vehicle is sold for per­sonal, family or household purposes, or is covered as a small business, Magnuson-Moss for all practical purposes does not change what has been said under the preceding section cov­ering the implied warranty of merchantability under Song-Beverly.

If Song-Beverly does not apply (for example, in a sale for business purposes excluding small business), then Mag­nuson-Moss prevents a dealer from disclaiming the UCC warranty of merchantability if a dealer enters into a service contract within 90 days of the sale, or, whether directly or through “adoption,” issues a written warranty.

The Act defines a service contract as a “contract in writing to perform services relating to the maintenance or repair (or both) of a consumer product.” One court has held that the selling of a service contract between a buyer and a third party does not create a contractual obligation between the dealership and the buyer and does not prohibit the dealership from disclaiming implied warranties.

In a 2001 Seventh Circuit case, the plaintiff knew he was purchasing the used motor vehicle at issue “as is” from the dealership and the dealership’s paperwork properly disclaimed all express and implied warranties, including the implied warranties of merchantability and fitness for a particular purpose. Yet several months later when the plaintiff discovered that the vehicle had suffered previous damage, he sued the dealership alleging, among numerous other claims, that the dealership breached the implied warranty of merchantability under Illinois law. The plaintiff claimed that the dealership was prohibited from disclaiming the implied warranties because he purchased a service contract when he originally bought the vehicle. The U.S. Court of Appeals for the Seventh Circuit disagreed. The Court held that the service contract could not be construed as creating a warranty of merchantability because the service contract bound the service administrator, not the dealership, to repair the vehicle. Selling a service contract between a consumer and a third party does not create a contractual obligation between the dealership and the consumer and it does not prohibit the dealership from disclaiming implied warranties in Illinois.

The Federal Trade Commission has issued an opinion stating that “Where a dealer merely acts as a sales agent in selling a third party’s service contract or extended warranty, the dealer may in fact disclaim implied warranties under the Magnuson-Moss Warranty Act.” Although the FTC’s informal opinion is not binding in court, it provides further assurance that when a dealer sells a service contract as the agent of a third-party service provider, without the dealership itself incurring any obligations to perform or pay for repairs, the dealer can disclaim implied warranties. For more information, see “A Businessperson’s Guide to Federal Warranty Law” at: https://www.ftc.gov/tips-advice/business-center/guidance/businesspersons-guide-federal-warranty-law

Express Warranties

Neither Song-Beverly nor Magnuson-Moss im­pose any duty on a dealer to make any express writ­ten warranty on a new car sale. Therefore the discussion of the requirements under these two Acts for the contents of a written warranty is deferred to the section entitled “Warranties As They Relate To Used Car Sales.”

Magnuson-Moss and Song-Beverly also regulate the content of service contracts. Service contracts must conspicu­ously disclose in simple and readily understood language the terms, conditions, and exclusions of the contract. Moreover, under Magnuson-Moss, various “legends” (that is exact statements re­quired by law) may be required in the service contract, and certain types of provisions, such as clauses making the dealer’s decision final, are prohibited. Since these requirements are exten­sive and extremely technical, they will not be dealt with here. (See the chapter in this Guide entitled Service Contracts.) Unless a dealer is working with a reputable serv­ice contract administrator who has had the form service contracts to be used by the dealer carefully drafted, reviewed, and updated by legal counsel, an attorney should be consulted before any service contract, or written warranty made by the dealer, is issued to any customer.

As to unwritten express warranties, formal or in­formal, a dealer may be bound by any affirmation of fact or promise made by salespersons relating to the quality, performance, or value of the vehicle sold.

While Magnuson-Moss and Song-Beverly do not apply to unwritten warranties, under the UCC, a dealer may be held li­able for an unwritten warranty if a salesperson makes an affirmation of fact or promise relating to the quality or performance of the vehicle sold. The type of oral affirmations that may be considered express war­ranties usually center around claims that a salesperson represented a much higher mileage range for a particu­lar electric vehicle or made representations regarding the hauling capacity of a truck or the towing capacity of a vehicle. Such oral representations often take priority over any disclaimers contained on the back of the contract and salespersons should be cau­tioned in this regard.

The Adoption Problem

Although Magnuson-Moss and Song-Beverly ap­ply in most respects only against the party making a written warranty, (for example, the manufacturer), sometimes arguments are made that the dealer, by passing on the warranty of the manufacturer, has “adopted” the factory warranty as its own. If the adoption theory is accepted, the dealer can be sued for failing to live up to the terms of the warranty, or for warranty law violations that, absent adoption, could only be as­serted against the factory. Some plaintiff attorneys have made the argument that a third-party obligor service contract was in fact “adopted” or otherwise structured such that the dealer should be considered the true obligor and therefore prohibited by Magnuson Moss from disclaiming implied warranties.

The adoption principle does not take away any rights the dealer would have against the factory to be indemnified against such claims, but a finding of adoption would give a disgruntled customer the abil­ity to bypass any action against the manufacturer and proceed directly against the dealer.

Although no reported California court cases di­rectly address the issue of adoption of new car war­ranties, several out-of-state cases have. Adoption has been found to result from language on the re­verse side of a sale contract that assured the buyer that the dealer would promptly perform warranty re­pairs; from the dealer’s issuance of a pre-delivery checklist; from poorly drafted language in a warranty booklet that seemed to obligate the dealer; and from the dealer’s stamping of its dealership name on the factory warranty booklet.

As discussed in the following section, California’s Song-Beverly Act specifically recognizes that manu­facturers must reimburse dealers for claims and damage caused by violations of the factory’s war­ranty duties. While this fact may help reduce the chance of an adoption finding in California, dealers must guard against statements or action which would lead buyers to believe the dealer stands as co-warrantor with the factory under the factory war­ranty.

Pre-Sale Availability of Warranties

Although Magnuson-Moss does not require that a dealer give any written warranty, it does require that a dealer make the terms of the manufacturer’s written warranty available to potential buyers prior to sale.

With respect to new car warranties, Mag­nuson-Moss requires that the manufacturer giving the warranty provide the dealer with the warranty materials necessary for the dealer to comply with the requirements.

A dealer is required to comply with “pre-sale availability” rules mandating that the text of any written warranties offered with the vehicle be readily available to shoppers. The dealer must either con­spicuously display the text of the written warranty in close proximity to the product, or post signs in con­spicuous places advising that the warranties are available for inspection. The FTC enforces this re­quirement through “test shoppers” that it employs to catch violations of such technical requirements.

Since Magnuson-Moss covers all written warran­ties, whether for new or used cars, the dealer also has a similar obligation to make available to pro­spective customers for used cars the terms of any written warranty provided in connection with used car sales. Thus, if a dealer offers a 90 day 50-50 used car warranty, or some such similar warranty in connection with a used car sales, it should be posted in a conspicuous place to attract the attention of used car purchasers, or a notice that such a warranty is available should be posted.

Likewise, it is possible for the FTC to argue that the text of any unexpired manufacturer’s warranty on a used car also be available for inspection prior to the sale.

Shifting Warranty Law Responsibility to the Factory

It is important to realize that the law is on the side of the dealer when it comes to who is ultimately responsible for the loss occasioned by a breach of warranty of a new vehicle. The manufacturer made the vehicle and should be responsible for its quality. Although both the dealer and manufacturer are liable to the customer for breach of an implied warranty of merchantability, the law specifically provides that the dealer is entitled to indemnity against the manu­facturer for any resulting liability. In addition, the manufacturer is also liable on its express warranty and many other duties imposed by Song-Beverly.

Furthermore, the “Lemon Law” specifically provides that if the vehicle under warranty can­not be repaired to conform to the applicable war­ranties after a reasonable number of attempts, the manufacturer must at the option of the buyer, and provided the buyer has followed the law’s proce­dures, either replace the goods or reimburse the buyer in an amount equal to the purchase price paid by the buyer, less that amount directly at­tributable to the use by the buyer.

As soon as a war­ranty dispute develops a dealer may consider doing the following:

  1. Get the manufacturer involved. When the matter is still in the talking or letter writing stage do not hesitate to advise the customer of both his or her and the dealer’s rights against the manufacturer.
  2. If the customer has an attorney, have an attor­ney contact the customer’s attorney before any suit is filed to see if he or she can head off the dealer being named in the lawsuit, or to at least make sure the customer’s attorney names the manufacturer as a defendant in the lawsuit, and that he or she is familiar with the manufacturer’s liability under the “Lemon Law” provisions if they are applicable to the particular dispute.
  3. If the suit has been filed naming both a dealer and the manufacturer as defendants, first tender the de­fense of the action to the manufac­turer or have an attorney tender the defense. The willingness of a manufacturer to take over the defense is greatly influenced by whether any alle­gations are made of independent dealer misconduct, such as fraud, negligent repair, or after-market ac­cessory failure. Absent such allegations, dealers gen­erally are entitled to defense and indemnification with no duty to contribute. If a dealer encounters resistance, consider threatening a cross-complaint against the manufacturer for indemnity, because under the applicable law a dealer is entitled to full in­demnity from the manufacturer, and under the Vehicle Code, dealers are entitled to indemnity from the manufacturer based the condition or design of the vehicle or parts or on any service systems or procedures required or recommended to the dealer by the manufacturer.
  4. If the manufacturer is not ­willing to take over the defense, then a dealer has the option of filing a cross-complaint for indemnity or can wait for the outcome of the action and if a judgment is ren­dered against the dealer, the dealer can then file a complaint for indemnity in a separate action if the manufac­turer does not agree to pay the entire judgment.
  5. If a dealer does not file a cross-complaint, consider, with the assistance of an attorney, the “vouching in” provisions of the California Uniform Commercial Code. Under this stat­ute, a dealer is allowed to place the factory on notice that a lawsuit is pending and thereby bind the factory to any determination made in that suit as to the condition of the vehicle, even if the factory is not a party to the case. This means that a dealer does not have to re-litigate the condition of the vehicle in any subsequent suit against the factory for in­demnification.
  6. If the manufacturer is not named in the lawsuit and the customer’s complaint is directed solely at the dealer, which unfortunately happens quite often, the dealer has several alternatives. The first one is to first check the dealer sales and service agreement with the manufacturer to see if there is an indemnity clause for breach of warranty claims against the dealer. If so, the provisions of the dealer sales and service agreement for remitting the lawsuit to the manufacturer should be followed. If there is no such indemnity agreement, or the dealer believes the manufac­turer has wrongfully rejected a claim that the manufacturer should defend, then the dealer should consider consulting with an attorney about other ways to involve the manufacturer in the litigation. One of these considerations will be the “vouching in” provisions discussed above. Another will be review and possible resort to the indemnification provisions of the Vehicle Code.
  7. Finally, a dealer should also consider tendering the de­fense to the dealer’s liability insurance carrier.

Used Car Warranty Issues

Implied ­Warranty of Merchantability

Under The ­UCC

Just as with new car sales, the UCC imposes an implied warranty that a used vehicle is merchantable unless disclaimed in the manner prescribed by the UCC. To be merchantable, under most circumstances, a used vehicle would be required to meet the safety requirements of the Vehicle Code with respect to lights, windshield wipers, brakes and tires. In addition, it should be fully operational with all accessories such as radio, heat and air condition­ing in working order. At the time of sale it should have no known mechanical problems other than those inherent in the vehicle based upon its age and mileage. In this regard, custom in the industry has a significant bearing on what is expected in the way of performance of a used motor vehicle.

If a used vehicle does not meet minimum require­ments such as these, it would be risky to sell such vehicle at retail without a disclaimer of the implied warranty of merchantability. However, so long as the dealer neither issues the dealer’s own used vehicle warranty nor enters into a service contract as the obligor with the buyer at the time of sale or within 90 days, the dealer is permitted to disclaim the all implied warranties.

Duration of Implied ­Warranty Of Mer­chantability

Although the UCC implied warranty of merchantability has no “duration” as it were – it relates only to the condition of the vehicle at the time of sale – the period of time it takes for a problem to develop is evidence of the vehicle’s condition at the time of sale. A major problem that develops quickly can prove that the vehicle was in poor condition when delivered, while a sufficiently long period would establish little or no problem at the time of the sale. For convenience, this period can be referred to as the “length” of the implied warranty. The length will vary based upon the sales price, age, and mileage of the vehicle. The newer and more expensive the model, the longer the duration.

An indication as to what the legislature considered to be a reasonable period within which problems must manifest themselves is available by looking to the Song-Beverly Act, which specifies that its implied warranty of merchantability for used vehicles will extend for not less than 30 days nor more than 3 months. These numbers certainly can be cited and urged as reasonable guidelines in the event a claim is asserted under the UCC implied warranty regarding a problem which arises after the 90 day period. If any customer or customer’s attorney asserts such a claim, and if a dealer denies the claim, the dealer can point to the maximum period of 3 months set forth in Song-Beverly.

However, this approach may be challenging in view of the decision of the Court of Appeal in Mexia v. Rinker Boat Company, Inc. That case holds that even though the Song-Beverly implied warranty of merchantability is of limited duration, as long as the four year statute of limitations is not violated, a buyer can still sue for breach of the warranty even if the defect were discovered months or years after the warranty expired – so long as the jury is convinced that the defect did exist within the duration of the warranty.

In effect, the court in Mexia took the notion of a “condition” warranty from the UCC (where a buyer can sue if a very serious defect existed at the time of sale even if not discovered for years thereafter) and applied it to Song-Beverly, contrary to the general view that the Song Beverly implied warranty is a warranty to keep the vehicle merchantable for the duration of the warranty.

Under Song-Beverly

Song-Beverly provides that the obligation of a retail seller of used consumer goods who sells such used goods with a written warranty shall be the same as that imposed on manufacturers giving express written warranties under the Act. As pointed out before, when a warranty is given, or service contract entered into, there can be no waiver of implied warranties. Accordingly on any used car sale in which a dealer issues a written warranty, the dealer will also be held responsible for an implied war­ranty of merchantability. Fortunately, Song-Beve­rly further provides that a dealer may limit the duration of implied warranties to the duration of the express warranty, and automatically makes its implied war­ranty of merchantability coextensive in duration with the written warranty given by the dealer, but in no event shall such implied warranty have a duration of less than 30 days nor more than 3 months following the sale of the used vehicle with any warranty. It is un­clear as to whether implied warranties imposed un­der the UCC and other laws are subject to this automatic limitation, so any used car war­ranty should specifically limit them accordingly.

Once again, these provisions relate only to sales for a personal, family, household, or small business purpose.

Under Magnuson-Moss

On sales of consumer products covered by Mag­nuson-Moss, the dealer cannot disclaim the implied warranty of merchantability if the dealer gives its own written warranty, or enters into a service contract as the obligor with the buyer at the time of sale or within 90 days there­after. In these cases, the implied warranty may be limited in dura­tion to the duration of a written warranty of reason­able duration provided the limitation is set forth clearly and prominently on the face (which means first page) of the warranty. If no written warranty is given, but a service contract is entered into, then the duration of the implied warranty of merchantability, according to the FTC, may not be limited.

Disclaiming Implied Warranties

Except where a dealer issues a written warranty or enter into a service contract as an obligor, the implied warranty of merchant­ability can be disclaimed on used car sales.

The disclaimer is accomplished in the simple manner prescribed by the UCC, and in addition, the “AS IS-NO WARRANTY” box must be checked on the Buyers Guide required to be at­tached to the used vehicle by the FTC Used Car Rule. The UCC method of disclaimer is set forth in answer to the question in the section of this chapter entitled “WARRANTIES AS THEY RELATE TO NEW CAR SALES” regarding how to disclaim this implied warranty. The disclaimer contained on the back of most conditional sale contract forms can be sufficient, but in connection with the disclaimer of the implied warranty of mer­chantability on a used car sale a dealer may consider having the words “as is” stamped or written in a conspicuous manner on the front side of the contract obtain the cus­tomer’s initials in proximity to where the words “as is” are placed. This procedure will support additional evidence of an as-is sale, including checking the “AS IS – NO WARRANTY” box on the Buyers Guide required by the FTC Used Car Rule to be attached to the used vehicle.

Disclaimer language in used car sale contracts is very important. Unlike the case of a new car, where the manufacturer has issued a warranty, and the dealer is thus prohibited from disclaiming any implied warranties and the manufacturer is required to deliver a relatively “lemon free” vehicle, in the used car setting, there is generally no warranty, and no manufacturer to fall back on in the event of a problem.

Certified Used Vehicles

The Car Buyers Bill of Rights prohibits the sale of a certified used vehicle “as is.” The law also specifically prohibits disclaimer of the implied warranty of merchantability as to certified used vehicles. Most factory sponsored certified preowned (CPO) programs feature a factory extended warranty or service contract. However, the law applies even if there is no factory CPO program involved – the law is triggered solely on the basis of the words used to advertise and describe the vehicle.

PRACTICAL TIP

Check all documents used to transact used vehicle sales to ensure that “as is” references and waivers or disclaimers of the implied warranty of merchantability have been deleted or have been made inapplicable to certified used vehicles.

Dealer ­Express ­Warranties on Used Car Sales

This section discusses the implications of Magnuson-Moss and Song-Beverly on express warranties for used cars. Since other laws may also apply, dealers should consult with an attorney prior to implementing a used car warranty program.

Written Warranties Under Magnuson-Moss

If a dealer issues a used vehicle warranty, a dealer can control the dealer’s exposure by the terms that are chosen to be provided to customers.

Any written used car warranty that a dealer gives must conform to the requirements of Magnuson-Moss. Since as a practical matter a dealer will never be giving a full warranty as that term is used in Magnuson-Moss, a dealer must under the law clearly and conspicu­ously label any warranty that is given as a “limited warranty.” Generally speaking, a dealer is obligated to fully disclose in sim­ple and readily understood language the terms and conditions of the warranty.

The warranty must contain the following informa­tion: (1) the name and address of the warrantors, (2) the identity of the party to whom the warranty is extended (the consumer), (3) the products and parts covered (including a description of the vehicle), (4) what the dealer will do in the event of a defect, malfunction, or failure to conform to the warranty – at whose expense – and for what period of time, (5) what the consumer must do and the expenses he/she must bear, (6) any exceptions and exclusions from the terms of the warranty (these should also be disclosed on the Buyers Guide), (7) the procedure the consumer should take in order to invoke the warranty, (8) the availability of any informal dispute resolution procedure offered by the warrantor, (9) a brief, general description of the legal remedies available to the consumer, (10) the time at which the warrantor will perform any obligations, (11) the period of time after notice that the warrantor has to perform its obligations, (12) parts that are not covered by the warranty, (13) the elements of the warranty as to its nature or scope, including a statement of what the dealer will do and will not do in the event of a problem, (14) any limitations on implied warranties or remedies such as consequential dam­ages, and (15) a statement that state law may render the above limitations void and may give the buyer additional rights. Items 14 and 15 must be on the first (“face”) page of the warranty.

Magnuson-Moss prohibits certain provisions in warranties and service contracts that might appear reasonable and expected:

  • No warranty or service contract may give the warrantor the final decision on any question of fact. Thus, it is illegal to say “dealer’s decision regarding the nature and extent of any defect is final.”
  • No warranty or service contract may “tie-in” cov­erage under the warranty to use of any supplier’s goods or services, unless those goods or services are provided at no charge. Thus, unless a dealer offers free service to warranty or service contract holders, it is illegal to say “this warranty will be void unless routine service is performed by us” or “by an authorized General Motors dealer.”

It is recommended that any limited warranty that a dealer provides customers contain a limita­tion on the duration of all implied warranties, with specific reference to those of merchantability and fitness, to a period of time no less than the writ­ten warranty provided, or such shorter period as allowed by law.

It is also strongly recommended that a dealer specifi­cally exclude any right of the buyer to recover con­sequential damages resulting from a breach of both the express warranty and any implied warranties of merchantability or fitness for a par­ticular purpose.

The warranty should also limit a dealer’s li­ability for a breach of the express warranty and the above two implied warranties to repair of the vehicle or replacement of defective parts and it should clearly set forth any percentage of labor or materials that the customer will be required to pay. The above limitation on the duration of the implied warranties together with these limitations on damages must ap­pear on the face of the warranty in clear unmistak­able language and they must be prominently dis­played.

Additionally, Magnuson-Moss contains many technical requirements, including the requirement that, for some of the above limitations to be effec­tive, certain legends must be set forth which would appear to apply only to interstate manufacturers, but which are nevertheless required, including “Some States do not allow limitations on how long an im­plied warranty lasts, so the above limitation may not apply to you,” and “Some States do not allow the exclusion or limitation of incidental or consequential damages, so the above limitation or exclusion may not apply to you.” It is therefore strongly recommended that any written warranty given by a dealer be reviewed by counsel prior to its use.

The Magnuson-Moss required “limited warranty” description and warranty content requirements only apply to warranties as they are defined under Mag­nuson-Moss. A term such as “free trial exchange privilege” or a promised right to return within a designated number of days are not warranties under Magnuson-Moss and need not be labeled as such, although these programs could very well run into single document rule issues. See the section entitled The Single Document Rule in the chapter in this guide entitled Automobile Sales Finance Act.

Written Warranties Under Song-Beverly 

Song-Beverly also covers dealer express warranties on used car sales by providing that the obligation of a retail seller of used consumer goods who sells such goods with a written warranty shall be the same as that imposed on manufacturers giving express written warranties on new goods under the Act. The Act obligates the dealer to maintain sufficient repair and service facilities to carry out the terms of such express warranties.

The scope of what constitutes a “written warranty” under this section of Song-Beverly was defined by the California Supreme Court in a 2004 decision. The Court held that a written service contract,  under which the dealer undertakes to preserve or maintain the utility or performance of the vehicle, is NOT an express written warranty under the Act. As a result, service contracts are not be considered express warranties so long as the service contracts do not make any reference to terms such as “warranty” or “guarantee,” and are not called an “extended warranty.” Consequently, dealers wishing to preserve the distinction between service contracts and warranties under the Lemon Law should carefully review the names, labels and content of all their service contract programs. Additionally, an unpublished Court of Appeal decision left open the possibility that oral representations made to a buyer that a service contract is a warranty or guarantee may be sufficient to bring a service contract within the scope of Song-Beverly.  Thus, dealers should also be very careful that such representations are not made in connection with the sale of a service contract.

Oral Express ­Warranties – Commercial Code

Any oral af­firmation of fact or promise made by a salesperson to the customer which relates to the goods being sold and which is made during the “dickering” over the terms of sale will constitute an express warranty under the Commercial Code.

Dealers must keep a very careful watch and control over sales personnel particularly with respect to representations relating to the condi­tion of a used vehicle. Expressions such as “this car has been completely overhauled,” and/or “this car has been fully reconditioned,” are extremely dan­ger­ous. What a dealer might consider “fully recon­ditioned” to mean and what a customer construes these words to mean are probably going to be en­tirely different and unfortunately the courts will construe such language in most instances in favor of the customer. Salespersons should be strongly cautioned not to use such language. If a set procedure for reconditioning used cars that are sold, it may be prominently displayed so that it will set the limit. The customer will then have a more difficult time convincing any court that he or she was told anything beyond the displayed limit.

Disclaiming Oral Warranties

Clauses appearing in contracts which purport to eliminate oral statements by sales personnel are often ignored by courts. For example, one case found such a clause insufficient to overcome a claim of oral warranty and held that the following elements are necessary before an express oral warranty may be effectively disclaimed: the disclaimer must be specifically negotiated between the buyer and seller; the disclaimer must set forth the particular qualities and characteristics of performance that are not being warranted; the disclaimer must be made a part of the bargain between the parties; and the disclaimer must be agreed upon before the sale was completed.  

Furthermore, disclaimers are often ignored based on the court’s interpretation of some consumer protection statutes, such as the Consumers Legal Remedies Act. Nevertheless, disclaimers can be effective in at least limiting the range of claims a dealer may be required to defend.

The FTC Used Car Rule

Magnuson-Moss au­thorized the FTC to commence rulemak­ing procedures on used vehicle sales and to adopt a disclosure rule on warranties and warranty practices. The final result of this authorization is the FTC Used Car Rule (“Rule”). The purpose of the Rule is to give meaningful dis­closures relating to warranties to a used car purch­aser, and this is primarily accomplished by display­ing a “Buyers Guide” for each used car being offered for sale.

Sales Governed by The Rule

By reason of the broad definitions contained in the Rule, all used car sales by a dealer to a consumer including the sale of demon­strators, company cars and light duty trucks are governed by the Rule.

A “vehicle” as defined in the Rule means “any motorized vehicle, other than a motorcycle, with a gross vehicle weight rating (GVWR) of less than 8,500 lbs., a curb weight of less than 6,000 lbs., and a frontal area of less than 46 sq. ft.” This definition is designed to include within the Rule’s coverage the sale of light duty trucks and exclude larger trucks and recreational vehicles. A “used vehicle” is defined as “any vehicle driven more than the limited use nec­essary in moving or road testing a new vehicle prior to delivery to a customer.” It should be noted that since this definition clearly encompasses demon­strators and company cars, there will be instances where the Buyers Guide label required by the Rule must be affixed to vehicles which also bear a Monroney Act sticker.

Since the Rule defines a consumer as any person who is not a used vehicle dealer, sales of used vehicles to per­sons and entities for a business purpose are cov­ered by the Rule. Dealer trades, wholesale sales, and sales between dealers are excluded as are lessor-lessee sales.

Unfair and Deceptive Practices

The Rule declares that it is a deceptive act or practice for any used vehicle dealer, when that dealer sells or offers for sale a used vehicle: (1) to misrep­resent the mechanical condition of a used vehicle; (2) to misrepresent the terms of any warranty offered in connection with the sale of a used vehicle; (3) to rep­resent that a used vehicle is sold with a warranty when the vehicle is sold without any warranty; (4) to fail to disclose, prior to sale, that a used vehicle is sold without any warranty; and (5) to fail to make available, prior to sale, the terms of any written war­ranty offered in connection with the sale of a used vehicle.  The Rule specifically provides, however, that if a dealer complies with the five basic requirements set forth below, the dealer does not violate these prohibitions of the Rule. Do not confuse item (5) above with the requirement that a written warranty document be delivered at the time of sale if a vehicle is offered with a used car warranty. That document, separate and apart from the Buyers Guide, must still be given to the customer.

Requirements

There are five basic requirements which must be met in connection with a used car sale to a consumer to comply with the Rule. These are as follows:

  1. The dealer must complete and display a “Buyers Guide” on all used vehicles offered for sale to a consumer. The ex­act wording and form of the “Buyers Guide” has been prescribed by the FTC, and forms prepared in accordance with the specifications of the Rule may be ordered from The Reynolds and Reynolds Company. The Buyers Guide must be displayed prominently and conspicuously in any location on the vehicle in such a fashion that both sides are readily readable. It is per­missible to remove a form temporarily from its display location during a test drive, but it must be returned as soon as the test drive is over. The Buyers Guide forms are available at the following addresses: English:https://www.ftc.gov/system/files/documents/plain-language/cfr_buyers_guides_english.pdf Spanish:https://www.ftc.gov/es/system/files/documents/plain-language/spdf-0083-guia-del-comprador.pdf
  2. The dealer must deliver either the original or a true copy of the Buyers Guide to the buyer at the conclusion of the sale. If during the negotia­tions for the sale changes have been agreed upon with respect to warranties or the lack thereof which differ from those disclosed on the Buyer’s Guide, the Buyers Guide should be corrected to comply with the changes before delivering it or a copy of it to the customer. Although the Rule does not re­quire the dealer to retain the original or a copy of the Buyers Guide, it is recommended that this be done, and it is further recommended that the dealer obtain the customer’s signature or initials on both the original and copy, particularly where there have been changes or where the vehicle is being sold without a warranty.
  3. The sales contract itself must incorporate the information included on the Buyers Guide. The contract must set forth in a conspicuous manner the following language: “The information you see on the window form for this vehicle is part of this contract. Information on the window form overrides any contrary provi­sions in the contract of sale.” It is incumbent that each dealer examines the con­tract forms being used by the dealership, both English and Spanish, to make sure that this re­quired disclosure is included.
  4. If the used car sale is conducted in Spanish, both the Buyers Guide and the contractual disclosure statement must be in Spanish. Before any sales efforts are conducted in Spanish, a Spanish version of the Buyers Guide must be posted on the vehicle. As a practical matter, both English and Spanish ver­sions of the Buyers Guide should be displayed where Spanish language sales are not uncommon.  The revised Buyers Guide form that went into effect on January 27, 2017 includes a sentence in Spanish on the face of the English language Buyers Guide alerting Spanish-speaking consumers who cannot read the Buyers Guide in English to ask for a copy in Spanish.
  5. The dealer may not make any statements, oral or written, or take other actions which alter or contradict the disclosures contained on the Buyers Guide, or use the Guide to make disclosures about other matters.

Form And Content Of The Buyers Guide

As long as a dealer uses an approved Buyers Guide form, the necessary disclosures are included in the form, and there are only a few blanks required to be filled out by the dealer. Dealers should not make any other changes to the Buyers Guide other than filling in these blanks. Even changes which do not modify the content of the form, such as providing a Spanish translation directly on the English form, do not satisfy the Rule’s requirement that the Guide be prepared and printed exactly as instructed in the Rule.

The basic disclosures which will be found on any approved form are a notice that spoken promises are difficult to enforce and that the dealer should be asked to put all promises in writing; a pre-purchase inspection notice suggesting that the customer should ask the dealer if he or she may have the vehicle inspected by a mechanic either on or off the lot; a notice that the in­formation on the form is part of any contract to buy the vehicle and removal of the form before sale (except for test driving) is a violation of federal law; a suggestion that the customer obtain a vehicle history report and check for open safety recalls; and a list of some of the major defects that may oc­cur in used motor vehicles.

The dealer is required to complete the Buyers Guide by filling in the following information at the places indicated on the form:

  1. The make, model, model year, and VIN number of the used vehicle offered for sale should be set forth on the form.
  2. If the vehicle is being sold without any warranty express or implied, the “as is – no dealer warranty” box on the appropriate form should be checked. If a service con­tract is available, the smaller-print “service con­tract” box must be checked. The “as is – no dealer war­ranty” box may be checked even though the dealer also checks the service contract box.  The “as is – no dealer warranty” form should only be used for vehicles with no warranty coverage at all.  For all other vehicles, the “implied warranties only” form should be used.
  3. If the vehicle is being sold as certified pre-owned, but the dealer itself is not offering its own warranty, the “implied warranties only” box on the appropriate form should be checked.  The “as-is” form should never be used in connection with the sale of a certified pre-owned vehicle.
  4. If the vehicle is being sold with remaining factory warranty coverage, and the dealer is representing that to the customer, the “implied warranties only” box on the appropriate form should be checked.
  5. If a dealer warranty is given, the dealer must check the “dealer warranty” box and must also check the box ­indi­cating whether the warranty is a “full” or “limited warranty.” Because as a practical matter a dealer will never be giving a “full” warranty as that term is used in Magnuson-Moss, in any used car sale where a warranty is given, the “limited warranty” box should always be checked. The percentage of labor and percentage of parts the dealer agrees to pay should be filled in at the appropriate spaces as well as the systems covered and the duration of the warranty. The specific systems covered by the warranty, for example, “engine, transmission, dif­ferential,” are to be listed. A dealer cannot use short hand, such as “drive train” or “power train” for covered systems. A dealer can make use of the list of defects provided by the FTC on the reverse side of the Buyers Guide to describe covered systems. That list contains under each system a series of possible problems that could arise concerning each system. Although a dealer does not have to list on the Buyers Guide each and every exclusion pro­vided in the warranty, if the dealer’s warranty excludes any of these potential problems from any covered system, this fact should be set forth on the face of the Buyers Guide. Exclusions should also be stated whenever they are necessary for “clarification.” An example would be to set forth “electrical system – battery excluded.” One other available alternative is to list under the “systems covered” section the statement “all systems shown on the reverse side of this Buyers Guide are cov­ered except for the following:” at which point a dealer would list all noncovered systems.
  6. If a service contract is available, the “service contract” box on the form should be checked. A service contract under the Rule means a contract in writing for any period of time or any specific mileage to refund, repair, replace, or maintain a used vehicle which is provided at an extra charge beyond the price of the used vehicle, subject to the contract not being regulated as insurance under state law.
  7. The name and address of the dealership should be placed at the space indicated.
  8. In the space provided, the dealer must put the name and telephone number of the person who should be contacted if any complaints arise after sale. This is a requirement which the FTC takes more seriously than one might expect.

Disclosure of Non-Dealer Warranties (Optional)

The revised Buyers Guide forms also provide boxes for dealers to disclose if the manufacturer’s warranty still applies, if a manufacturer’s used vehicle warranty applies (often CPO warranty), or if other used vehicle warranty applies.  Keep in mind that if the customer must pay to get coverage under the manufacturer’s warranty, a dealer may not check these boxes. 

The use of these boxes is optional, but if the dealer does disclose a non-dealer warranty on the Buyers Guide, it must be able to provide the customer a physical copy of the warranty and its terms or direct him/her where they can be accessed online. If the warranty is accessible online, the dealer must (1) provide the consumer with the warrantor’s website where the warranty terms can be accessed and reviewed, and the phone number, mailing address, or “other reasonable non-Internet based means” for the consumer to request a copy of the warranty terms, (2) provide a hard copy of the warranty terms promptly and free of charge upon the request of a consumer or seller, (3) ensure that the warranty terms are posted in a clear and conspicuous manner and “remain accessible to the consumer” on the warrantor’s website; and (4) provide sufficient information to allow the consumer to readily identify the warranty terms that apply to the specific warranted product.

Dealers should confirm that full and complete warranty terms are available for any non-dealer warranties disclosed on Buyers Guides.  There are at least a couple of vehicle manufacturers that do not provide full and complete warranty terms for their products online, or otherwise, potentially exposing dealers to possible enforcement action by the FTC.

Certified Pre-Owned Vehicles and the Buyers Guide

The prohibition against selling a certified used vehicle “as is” is easy to understand in theory, but can lead to confusion when it comes time to fill out the Used Car Buyers Guide. As discussed above, the “as-is” Buyers Guide form should never be used in connection with the sale of a certified pre-owned vehicle. Dealers should use the “implied warranties only” Buyers Guide form when selling certified vehicles.  If the vehicle is certified under a factory CPO program, and unless the dealer is offering its own warranty in addition to the CPO coverage, dealers should check the “implied warranties only box.”  

Additionally, if the dealer elects to disclose non-dealer warranties on the Buyers Guide, it should also check the “manufacturer’s used vehicle warranty applies” box to disclose the certified warranty coverage.  If there is also remaining manufacturer new vehicle warranty coverage remaining, as is often the case on certified vehicles, the dealer should also check the “manufacturer’s warranty still applies” box.

Certified used vehicle programs do exist that are not operated by the factory. If the certification program is the dealer’s, then the “dealer warranty” box should be checked as well as the box disclosing that it is a limited warranty with the percentage of parts and labor disclosed, as well as the systems covered and duration, as with any other dealer warranty.  If the certification program is operated by a third party, then dealers should check the “implied warranties only” box as well as the “other used vehicle warranty applies” box.

Used Car Warranty Questions and Answers

Must the dealer disclose whether the used vehicle is still covered by the manufacturer’s warranty?

Although not required by Magnuson-Moss or Song-Beverly, if the dealer has knowledge that the vehicle is covered by an unexpired manufacturer’s warranty, it is a good idea to disclose that the vehicle may be covered by manufacturer’s warranty be­cause otherwise the customer may later claim he or she needlessly paid for repairs that were covered under warranty. However, this issue raises the next two questions.

Do warranty booklets need to be available for all used cars with unexpired factory warranties?

No, but if they are not available, the dealer needs to be able to direct the customer where he or she can access the warranty terms online.  See discussion above on Disclosure of Non-Dealer Warranties.

Can implied warranties be disclaimed on used cars with unexpired factory warranties?

In some cases, but not all. Song Beverly’s implied warranty waiver prohibi­tion operates when written warranties “arising out of a sale” are given. The more positive and unequivo­cal the dealer’s statements concerning unexpired warranty coverage, the more likely will be applica­tion of the waiver prohibition. If the dealer merely advises the buyer of possible unexpired warranty coverage, there is a strong argument that no war­ranty was “given” in that sale. This becomes quite important given the length of emissions and rust-through factory warranties.

What if warranty terms are negotiated and agreed to that differ from those shown on the Buyers Guide?

If during the negotiations the dealer agrees to furnish a warranty, the dealer must make the appropriate changes on the Buyers Guide form before the sales contract is signed.

What are some examples of acceptable and unacceptable locations for displaying the Guide?

The FTC provided these examples of proper display locations: hanging from the rear view mirror; resting under the windshield wipers; or hanging from an exterior side view mirror. Examples given of improper locations were inside glove boxes; on the floor; or in the trunk. The requirement that both sides of the Guide be readable can be read, according to informal contact with the FTC, as authorizing the display of the Guide in a manner likely to give notice that two sides exist, and in a manner in which the customer can obtain access to both sides. For example, a Guide hanging from a side view mirror that comes to rest against the body of the vehicle would satisfy the Rule, even though the customer must turn the Guide over to read the back side.

Can I modify the Guide to serve as a disclosure tool for other purposes?

No. The Rule provides that the Guide it to satisfy and exact, line-by-line layout, which does not permit modification (except for filling-in blanks).

Warranty Issues Common to New and Used Car Sales

Notice of Extension of Warranty During Repair

One of the most significant provisions of Song-Beverly is its extension of the warranty period under any written warranty during the period the vehicle is in for repairs and providing for a notice of the buyer’s rights in this regard on all war­ranty repair orders.

Every work order or repair invoice for warranty repairs or service shall clearly and conspicuously incorporate in 10-point bold face type the following statement either on the face of such work order or repair invoice, or on the reverse side thereof, or on the attachment to the work order or repair invoice:

  • A buyer of this product in California has the right to have this product serviced or repaired during the warranty period. The warranty period will be extended for the number of whole days that the product has been out of the buyer’s hands for warranty re­pairs. If a defect exists within the warranty pe­riod, the warranty will not ­expire until the defect has been fixed. The warranty period will also be extended if the warranty repairs have not been performed due to delays caused by circumstances beyond the control of the buyer, or if the war­ranty repairs did not remedy the defect and the buyer notifies the manufacturer or seller of the failure of the repairs within 60 days after they were completed. If, after a reasonable number of attempts, the defect has not been fixed, the buyer may return this product for a replacement or a refund subject, in either case, to deduction of a reasonable charge for usage. This time extension does not affect the protections or remedies the buyer has under other laws.

If the required notice is placed on the reverse side of the work order or repair invoice, the face of the work order or repair invoice shall ­include a notice in 10-point bold face type: “Notice to Consumer: Please read important information on back.” A copy of the work order or repair invoice and any attach­ment thereto shall be presented to the buyer at the time warranty service or repairs are made.

This provision raises a number of questions for dealers and the following points cover the answers to the questions most frequently asked:

  1. The warranty period is extended only for the number of whole days that the product has been out of the buyer’s hands for repair. Thus, if re­pairs are effected and the vehicle returned or made available to the buyer on the same day there would be no warranty extension.
  2. The warranty extension provisions apply both to the manufacturer’s factory warranty and any dealer warranty on used cars.
  3. A dealer should not look to obtain a waiver of the warranty extension from the customer when the dealer is too busy to get to the particular customer’s job. Such a waiver would likely contravene public pol­icy.
  4. The notice requirement applies only to warranty repairs and does not extend to service where the customer pays the bill.
  5. The buyer must be provided with a work order or receipt with the date of return and the date the buyer was notified the goods were repaired or serviced.
  6. There is no requirement that the dealer maintain any particular record-keeping system whereby it can be ascertained how long any particular war­ranty has been extended. It is up to the customer to prove by testimony and by repair or­ders the length of time the customer contends his or her warranty has been extended.

    Factory Warranty Adjustment Pro­grams

    Song-Beverly requires disclosure of all factory programs to pay for or contribute to the repair of problems not covered by the new car warranty. The law now calls such programs warranty adjustment programs and re­quires dealers to do two things.

    Service Bulletin Availability

    Dealers must give notice to all prospective new car buyers or les­sees of the availability of factory service bulletins. Dealers can comply by posting the related sign set forth in the chapter entitled “Public Signs at Dealerships” in this Guide.

    Disclosure of Warranty Adjustment Pro­gram

    California law requires factories to give dealers written notice of adjustment programs within 30 days of creating the program. If a dealer has received notice of such a program, the dealer must disclose the principal terms and conditions of the program to all consumers seeking repairs for a condition covered by the program.

    Statutory Requirements for New Car Warranties Based on Mileage

    If a manufacturer or dealer of a new car makes any express warranty to the buyer which is based on the amount of miles that the car is driven, only those miles which the car has been driven on and after the date the car is first sold as new to the buyer shall be considered for purposes of the warranty. The mileage indicated upon the odometer on the date the new car is sold to the buyer shall be the mileage upon which the warranty shall commence.

    Statute of Limitations For Breach Of Warranty

    Unfortunately, the statute of limitations for breach of warranty is lengthy, and determining when it starts to run is complicated.

    For breach of the UCC implied war­ranty of merchantability, the statute of limitations is four years from the date of sale. Thus, a customer has four years from the date of sale under the UCC. Certain notice requirements are imposed on the customer, however, under the UCC, but these may not be applicable under the parallel Song-Beverly implied warranties.

    The statute of limitations for breach of express warranties, and for violations of the Song-Beverly Act and “Lemon Law,” is four years from the date the breach is or should have been discovered. Thus, if the vehicle is expressly warranted for one year and the defect occurs and is discovered 11 months after the date of sale, the statute of limitations extends four years from that date. A Lemon Law lawsuit may be filed four years after discovery of the existence of the inability to satisfactorily repair the problem, even if the problem was known immediately after sale.

    In any event, under express warranties a request for repair (or other relief if the customer claims repair would be insufficient) generally must be brought within the warranty period; otherwise, there is no breach of warranty. However, courts have found that the Song-Beverly implied warranties define a period of time in which they may be breached, and that a breach can be established by proof that a defect existed anytime within that warranty period, even if no claim was made within the warranty period (such as where the nonconformity is discovered after the warranty period expires).

    Remedies for Breach of Warranty

    The UCC contains basic remedies for breach of its warranty provisions. For a material breach of warranty, provided that timely notice of the breach is given, a customer is entitled to rescind the contract and obtain a return of the purchase price. The seller in this instance is entitled to an off­set based upon the depreciation occasioned by the buyer’s use. The buyer may also elect to retain the vehicle and sue for damages and the measure of damages for any breach of warranty is the difference between the value of the vehicle at the time of sale, and the value that the vehicle would have had if it had been as warranted, unless special circumstances show that damages should legally be for a different amount. Also, unless excluded by the terms of the warranty, a customer may recover incidental and consequential damages.

    You are entitled to include limitations on the cus­tomer’s right of recovery under the warranty, but these limitations must be prominently displayed on the face of the warranty and even then can be disal­lowed if they are unconscionable, or deemed to “modify” an implied warranty when an express war­ranty is given.

    Incidental and consequential damages can include such items as transportation costs while the cus­tomer was without the vehicle, car rental fees, cost of lodging in the event of a breakdown while on a trip, lost wages while dealing with problems necessi­tated by the defect, and in the event of a rescission, recovery of finance charges, sales tax and registra­tion fees. If damages awarded are liquidated – that is, easily calculated – then pre-judgment interest may be awarded as well.

    In addition to the above remedies, Song-Beverly provides that for any willful or intentional violation of its sections, including failure to observe any ex­press or implied warranty on a consumer product, the ­consumer buyer may be awarded three-times (“treble”) damages as well as reasonable costs, ex­penses and attorney’s fees. The California Supreme Court has held that dealers and factories may recover litigation costs from buyers who sue unsuccessfully under the Song-Beverly Act.

    Magnuson-Moss provides that any person who violates the Act commits a violation of section 5 of the FTC Act and is subject to the sanctions of the FTC. Magnuson-Moss also provides for injunctive relief to enjoin violations on the part of a manufacturer or dealer giving express written war­ranties. Except for Used Car Rule violations, Mag­nuson-Moss enforcement activity at the dealer level is relatively rare, but this should not operate as an excuse for not adhering to its requirements. FTC sanctions may run as high as $42,530 per violation.

    CAUTION

    Regarding Service Contracts: It is not recommended that a dealer include the giving of a service contract as part of the price of the vehicle. If the price of the ve­hicle is increased to cover the giving of a service contract, the selling dealer could be accused of vio­lating the Automobile Sales Finance Act because service contracts are to be sep­arately itemized on the contract. Further, a dealer may not offer a “free” or “at no extra charge” service contract in advance of the negotiating process.

    Factory Bankruptcy and Dealer Warranty Duties

    Song-Beverly imposes an affirmative duty on the manufacturer to provide service and repair facilities within this state that are reasonably convenient for performing warranty service. If a manufacturer became bankrupt and went out of business such that it no longer provided those repair facilities, Song-Beverly permits consumers to exercise remedies directly against the retailer who sold them their particular vehicle. If the facilities test is not failed (for example, because some dealers or other facilities continue to offer warranty repair within a reasonable distance), consumers must continue to follow the factory’s designated system for warranty service.

    If the manufacturer is no longer providing authorized facilities of any kind, Song-Beverly provides that the seller of that particular vehicle “shall” either repair or replace the vehicle; refund the purchase price; or send the buyer to an independent repairer willing to do the repair without charge to the consumer.

    For the cost of doing these things, the seller has a claim for reimbursement against the manufacturer , but nothing authorizes the seller to refuse to perform on the basis of non-payment, or expected non-payment, of those claims. Also, because the seller is identified as “the retail seller of those goods” (devoid of any reference to any continuing relationship with the factory), this obligation does not appear to be premised on the seller holding itself out as a retailer of the brand in question – that is, terminating the line-make from the brands the dealer represents may not make a difference in the dealer’s obligation.

    The consumer does not have these same rights against other retailers of the goods of the manufacturer. Other retailers of that manufacturer “may” undertake the same steps that are required of the retail seller (and thereby create for themselves a claim for reimbursement), but there is no obligation for them to do so.

    Thus, when a warranty claim is made to a dealer which no longer considers itself obligated under the dealer agreement to perform warranty work, the dealer needs to ask two questions:

    • Did it sell the vehicle?  If not, it is not required to repair it under Song-Beverly even if it is or at one time was a dealer for that make;
    • If it was the seller, has the factory failed the authorized facilities test, meaning there is no nearby dealer or factory facility still performing warranty work at the factory’s direction?  If so, the dealer must repair the vehicle even it never expects to be reimbursed. 

    Special Rules for Aids to the Physically Disabled

    Song-Beverly provides special rules concerning devices and equipment to assist a physically disabled person. An “assistive device” is defined in Song-Beve­rly as any instrument, apparatus, or contrivance, in­cluding any component or part thereof or accessory thereto, used or intended to be used to assist an individual with a disability. Dealers who should be aware of these rules as they may on occasion be called upon to sell or lease a vehicle which has been modified to accommodate a person with a physical disability.

    Any sale of such an assistive device, whether new or used, is not only subject to Song-Beverly’s im­plied warranty of fitness for that user’s particular purpose, but also must be accompanied by a written warranty that the seller must prepare and deliver to the buyer con­taining exact language required by the statute to the effect that if the device does not specifically fit the needs of the ultimate user (even if someone other than buyer), it may be returned to the seller within 30 days of the date of actual receipt of the item, or completion of installation and fitting by the seller, whichever occurs later. During that 30-day period, if the item is returned, it must be either adjusted or re­placed to the satisfaction of the user, or the total purchase price, without any deduction for loss of use, must be refunded. All contracts and security agreements executed in connection with the sale must also be promptly cancelled without penalty. Moreover, the law provides that these warranties covering assistive devices may not be waived or lim­ited, regardless of the language used in the contract.

    The law is silent as to whether an entire motor vehicle would be subject to these substantial war­ranty obligations simply because it contains special driving controls or a hydraulic lift for the physically disabled. It can be argued under the definition of the term assistive device, which includes reference to “components” and “accessories,” that only such components and accessories are covered, while the whole vehicle is not. However, if possible, it would be recommended that arrangements be made for the motor vehicle to be sold without assistive devices, and then for the assistive devices to be sold and in­stalled separately, preferably by a third party who specializes in such matters.

    Lemon Law Disclosure and Title Branding

    Song-Beverly specifies what circumstances trigger a dealer’s duty to disclose to a consumer the fact that a vehicle has previously been reacquired by the manufacturer to resolve an express warranty dispute.

    The law imposes on the manufacturer the burden of determining whether a vehicle repurchased with money from the manufacturer is a “lemon” or a “goodwill” buyback, and requires the manufacturer to complete the required Disclosure Form prior to offering such a vehicle for sale. In particular, the law sets forth the following requirements for manufacturers and dealers:

    Manufacturer Requirements

    1. Any manufacturer who reacquires or assists a dealer or lienholder to reacquire a motor vehicle in response to a request by the buyer or lessee that the vehicle be replaced or accepted for restitution (regardless of whether it meets the legal standard of a “lemon”) must, prior to any subsequent sale, lease, or other transfer, prepare, execute, and deliver to the subsequent transferee (which will usually be a dealer), a statutory Disclosure Form. A copy of the Disclosure Form is reprinted at the end of this chapter.
    2. When filling out the Disclosure Form, the manufacturer must list the following information:
      1. Year, make, model, and VIN of the repurchased vehicle;
      2. Whether: (i) the vehicle was simply repurchased after the last retail owner requested its repurchase due to specified problems, or (ii) the vehicle was repurchased because it had a defect, and title to the vehicle has been branded with the inscription “Lemon Law Buyback” (this election is made by the manufacturer checking one of two boxes on the disclosure form);
      3. The nature of each problem reported by the original owner; and,
      4. Repairs, if any, made to correct each reported problem.
    3. If the manufacturer makes a determination that the vehicle qualifies as a “Lemon Law Buyback,” the second box on the Disclosure Form must be checked and the manufacturer must, prior to transferring the vehicle to any other entity:
      1. Cause the vehicle to be retitled in the manufacturer’s name and title branded with the inscription “Lemon Law Buyback;” and,
      2. Affix a decal to the left front doorframe of the vehicle which specifies that title to the vehicle has been branded (dealers should instruct t