Business Buyers Pose Less Compliance Risk

OK, here’s an interesting lesson in consumer finance law. Go fetch a copy of the retail installment sales contract you’re using.

Up near the top of the document, you’ll see a place for the buyer’s name. When that name is the name of a corporation, partnership, association or any entity other than an individual (someone with a pulse), some laws and regulations that usually apply to retail installment sales of vehicles suddenly no longer apply. And that’s often true even when such an individual guarantees the obligation of such buyers.

You’ll also probably see check boxes that indicate whether the customer intends to use the vehicle “primarily” for business or “personal, family or household” purposes. What do you suppose is the purpose of that language? What was the lawyer drafting the form contemplating when he stuck those boxes in the form?

Here’s what. There are many state and federal laws that apply only when the “primary purpose” of the transaction is for “personal, family or household use.” A good example is the federal Truth in Lending Act. The TILA test for “primary purpose” is a 51-percent test (note that other laws and regulations might employ a different test).

When the “business” box is checked, the customer loses the protection of many federal and state laws that would apply had the “personal, family or household” purposes box been checked.

A recent case provides an example of a transaction exempt from some consumer laws because the buyer was a corporation. Courts often reach the same result when the buyer is an individual but buys the vehicle primarily for business purposes. Here’s what happened.

Ryan & Ryan, Inc. obtained financing from Ford Motor Credit Co., L.L.C. to buy a vehicle that James Ryan intended to use. James signed the security agreement as a “co-buyer” and signed a “Notice to Cosigner” stating that if Ryan & Ryan failed to pay, James, individually, would be responsible.

Ryan & Ryan defaulted on the note, and Ford sued to collect the balance due on the contract. The trial court granted Ford’s motion for summary judgment and motion to dismiss James’s counterclaims. James appealed.

On appeal, James argued that because he was a co-owner of the vehicle and the vehicle was for personal use, he was entitled to defenses under the Retail Installment Sales Act, Consumer Sales Practices Act, and Fair Debt Collection Practices Act. The appellate court found, however, that the promissory note and security agreement reflected the buyer of the vehicle as “Ryan & Ryan, Inc.,” with James signing as co-buyer.

The appellate court also noted that the “Notice to Cosigner” provided for James’s guarantee of the debt. In addition, the vehicle title listed Ryan & Ryan as the owner. As such, the appellate court concluded that the buyer of the vehicle was a corporation and that this was not a consumer transaction.

Many car buyers, and especially truck buyers, intend to use their vehicles primarily for business purposes. Even when they don’t intend to use the vehicle “primarily” for business purposes, there are people, I am told (egad, can it be true?), who might check the business-use box in order to bolster their fraudulent claims for an income tax depreciation and use deduction for their cars (hard to believe, I know).

When the buyer is someone other than an individual, or when that business-use box is checked, many claims and defenses the buyer might otherwise have against the dealer evaporate.

Now that’s a handy little thing to know.

Vol. 7, Issue 9