|Most courts don’t see Truth in Lending cases very often, so it isn’t unusual that when they do, they manage to drop the ball in deciding them. A federal judge in Ohio, confronted with a garden-variety spot delivery transaction, fell victim to this common tendency to make bad TILA law. Let’s take a look at what happened.|
|Brian and Jennifer Patton went to Jeff Wyler Eastgate, Inc. to trade in their car and buy a used 2003 Ford Windstar minivan. In connection with the purchase, the Pattons signed a retail installment sales contract which identified the Pattons as the “Buyer and Co-Buyer” and Wyler Eastgate as the “Creditor-Seller.” Under a section entitled “Federal Truth in Lending Disclosures,” the contract listed the financing terms and stated that the Pattons were agreeing to pay the “Creditor-Seller … the Amount Financed and Finance Charge according to the payment schedule.”
The installment contract contained a “merger clause.” That’s lawyer talk for a provision which stated that the installment contract was the entire agreement between the parties and that any changes to it must be in writing.
In addition to the installment contract, the Pattons signed a “Purchase Spot Delivery Agreement” stating that the Pattons were taking possession of the minivan before approval of financing and that Wyler Eastgate could demand return of the minivan, or have the Pattons pay the balance due, if it was unable to obtain third party financing or assign the contract to a third party within a certain period. The spot delivery agreement and the installment contract did not contain language incorporating the terms of one agreement into the other.
More than a month later, Wyler Eastgate demanded that the Pattons return the minivan because of its inability to obtain financing. Wyler Eastgate gave the Pattons their old car back once the minivan was returned to the dealership. Later, the Pattons sued Wyler Eastgate for violating the federal Truth in Lending Act and Regulation Z, claiming that the installment contract’s facially valid disclosures were rendered meaningless and illusory by the spot delivery agreement. The Pattons moved for summary judgment.
Wait a minute. Think about that. The TILA disclosures were “facially valid.” That sounds like they were accurate, doesn’t it? So what could be wrong?
In opposing the motion, Wyler Eastgate tried to argue that it was not a “creditor” under TILA. If you are a “Spot Delivery” reader, you know that this argument has “loser” painted all over it. The court quickly (and accurately) made mincemeat of the dealer’s argument on this point, concluding that Wyler Eastgate satisfied both requirements in the TILA definition of “creditor:” (1) someone who regularly extends consumer credit; and (2) someone to whom the debt is initially payable based on the face of the obligation.
Wyler Eastgate argued that it was not a “lending institution” and did not usually finance its own retail sales. Hint for Wyler Eastgate’s lawyer: Read the retail installment sales contract; you will find that it is an agreement to sell a car on credit. However, the court found that Wyler Eastgate did, in fact, regularly extend credit to its customers to finance car purchases. In support of this finding, the court noted that Wyler Eastgate required all buyers who financed their car purchases to sign installment contracts which listed Wyler Eastgate as the creditor, requested that monthly payments be made to it, and included a finance charge. As such, Wyler Eastgate was obligated to provide financing to the Pattons by the terms in the installment contract until the contract could be validly assigned to a third party or cancelled.
The court also found that Wyler Eastgate satisfied the second requirement in the statutory definition of a TILA creditor because it expressly identified itself as the Creditor-Seller on the installment contract to whom the Pattons were obligated to pay the amount financed and the finance charge.
Having concluded that Wyler Eastgate was a creditor under TILA, the court went on to determine whether Wyler Eastgate violated the act by using the spot delivery agreement. Wyler Eastgate argued that the TILA disclosures on the installment contract were valid when made and that other federal courts have upheld the spot delivery practice.
The court distinguished other federal cases which have upheld the spot delivery practice, stating that, in this case, the Pattons’ installment contract only provided Wyler Eastgate, not the Pattons, the ability to cancel the contract if financing was not obtained. The court did not address why this made any difference in its analysis and conclusions, and we can’t figure why it should. If both parties had the right to rescind, would there have been no TILA violation?
In addition, the other federal cases did not address the Pattons’ argument that the installment contract disclosures were rendered illusory by the spot delivery agreement. The court found that the language in the spot delivery agreement that “financing for your purchase has not been finalized” directly contradicted the language in the installment contract which disclosed the TILA financing terms and identified Wyler Eastgate as the Creditor-Seller to whom payments were due. The court found that the installment contract’s representation that Wyler Eastgate was providing credit for the Pattons’ minivan purchase on the financing terms stated in the contract was rendered meaningless by the spot delivery agreement’s language permitting Wyler Eastgate the authority to cancel the purchase. Therefore, the court concluded that Wyler Eastgate violated the TILA by using a spot delivery agreement to rescind the terms of a fully integrated retail installment contract.
The court’s analysis is almost certainly wrong. TILA is a disclosure statute. TILA doesn’t tell a creditor what the terms of the credit offering must be, but rather tells the creditor how it must disclose those terms.
TILA and Regulation Z say that TILA disclosures must be based on the terms of the contract between the parties. In this case, the parties agreed on financing terms, but also agreed that if the dealer couldn’t assign the contract, the contract would be rescinded. If financing ended up being provided under the contract, the disclosures describing the transaction were accurate.
Is the court saying that a credit contract that can be rescinded violates TILA and Reg. Z? If so, that will come as a surprise to all those creditors that make real estate loans that contain a 3-day right of rescission. Do all of those transactions violate TILA and Reg. Z?
Meanwhile, what’s an Ohio dealer or dealers in other states who don’t want to see this result to do?
First, the dealer should sit down with his or her lawyer and review the terms and conditions of the buyers’ order, the retail installment sale contract and any other document (like the “Purchase Spot Delivery Agreement” the dealer used in this case) that addresses any aspect of the “spot” part of the transaction. The documents need to be internally consistent with each other and may need to be incorporated into each other by adding appropriate language.
This analysis should give some thought to the terms of the spot delivery arrangement. We’ve seen spot deliveries done at least three ways.
Some dealers use a bailment agreement, in effect lending the car to the buyer until the dealer has located a source willing to purchase the buyer’s retail installment contract. When that financing source is found, the dealer has the buyer come in and sign the documents for the sale and financing of the car.
Some dealers use documents that say, in effect, “you, the buyer, and we, the seller, have signed all the necessary documents, but we agree that the deal isn’t done until we assign your contract.” This is a “condition precedent,” in lawyer talk – there is no deal before something (the assignment) happens.
Some dealers use documents that say, in effect, “you, the buyer, and we, the seller, have a final deal when all the documents are signed, but both parties agree that the deal can be rescinded if we are unable to assign the contract.” This is a “condition subsequent,” in lawyer talk – there is a deal, but if something (the inability to assign the contract) happens afterward, the deal goes away.
We’ve seen spot delivery agreements that seem to take parts and pieces from each arrangement described above. That’s a mistake – the agreements should reflect a consistent approach to one of the three arrangements.
Whether the dealer’s spot delivery agreements reflect a bailment, a condition precedent or a condition subsequent will depend on state retail installment sales, titling and other laws, the treatment of the arrangement under TILA and Reg. Z, the dealer’s tolerance for risk, and the advice the dealer’s lawyer provides.
One more thing to worry about.
Patton v. Jeff Wyler Eastgate, Inc., 2007 WL 756709 (S.D. Ohio March 8, 2007)
Vol 4, Issue 5
Cox Automotive’s latest Dealer Sentiment Index finds a ‘notable negative turn’ among U.S. dealers, the majority of whom took a dim view of the fourth-quarter market and their 2019 prospects.