The Consumer Financial Protection Bureau is a little over a year old, and the Federal Trade Commission’s new auto dealer task force is beginning to flex its muscles, but dealers and auto finance companies have yet to face any real heat from Washington. The biggest legal risk to the industry at the moment is still the class action lawsuit, which in the hands of a skilled plaintiffs’ lawyer, can still ruin your entire day.

I’ve been advising dealers for years that the best first line of defense against class action suits is the practice of requiring consumers to sign mandatory arbitration agreements as part of the car purchase and finance transactions they enter into. The use of arbitration agreements will not ensure victory when the class action lawyers come calling, but there is little downside to using them. And they can occasionally save the day. Here’s an example.

Stephen Aho bought a vehicle from a dealer which he financed under a retail installment contract. The dealer subsequently assigned Aho’s contract to AmeriCredit Financial Services, Inc.

Aho defaulted on the contract, and AmeriCredit repossessed his vehicle. AmeriCredit sent Aho a post-repossession reinstatement notice that, Aho alleged, did not comply with the requirements of California’s Automobile Sales Finance Act (CASFA).

Aho filed a class action complaint against AmeriCredit, alleging a violation of the CASFA. Aho moved to certify a class because AmeriCredit allegedly used the same standard and allegedly defective form of post-repossession reinstatement notice for all proposed class members (the use of standard forms is frequently the basis for asserting class status).

The U.S. District Court for the Southern District of California agreed that Aho satisfied the prerequisites for class certification for some class members, including numerosity (are there enough people to make up a class?), commonality (are the claims of those people alike?), typicality (is the “named” plaintiff’s claim typical of the other proposed class members?), and adequacy of representation (will the named plaintiff do a good job in asserting the rights of the class?). However, the court did agree with AmeriCredit that Aho’s claims were not typical of the proposed members of the class who were parties to a retail installment contract that included an arbitration clause.

So, in this instance, the presence of an arbitration agreement in the retail installment sales contract or as part of the deal package did not make the class action lawsuit go away. It did, however, reduce the size of the proposed class by eliminating from the class those proposed members of the class who had entered into arbitration agreements. That, in turn, will usually reduce the size of any settlement agreed upon by the parties or, if the matter proceeds to trial, the size of any damages award.

Sales finance companies often ask whether they should insist that all deals they buy have arbitration agreements as part of the deal package. This case offers a good reason to answer that question in the affirmative.

Vol. 8, Issue 10 

About the author
Tom Hudson

Tom Hudson


Thomas B. Hudson Esq. was a founding partner of Hudson Cook LLP and is now of counsel in the firm’s Maryland office. He is the CEO of LLC and a frequent speaker and writer on a variety of consumer credit topics.

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