Lessons Without the Pain

The saying says something like “Experience is the best teacher.” That usually means that the pain of the experience — touching the hot stove — is something you’ll remember. Wouldn’t it be swell if you could get someone else to experience that pain, and learn from that someone’s experience?

We’ve got that sort of deal in this month’s issue. Here are three cases involving arbitration, each one containing a different lesson for dealers.

Lesson No. 1: Beware Multiple Transactions.

When a dealer and a buyer “unwind” a transaction because financing cannot be provided or for other reasons, lots of documents are created. Unless the dealer has a procedure in place to handle the proper “undocumentation” of such transactions, bad things can befall the dealer. One of those bad things is the loss of the dealer’s ability to compel the buyer to arbitrate her claims.

On March 15, 2017, Miashonae Willis signed a retail installment contract and conditional delivery agreement with Setjo LLC, d.b.a. Kia of Bedford (Ohio), in order to buy a car. Apparently, the income information on Willis’s financing application was not complete, so Setjo required her to return the car.

When she returned the car on April 8, 2017, Setjo offered Willis a different car with different financing terms. Willis’s financing was not approved for the second car, and Setjo took back that car as well. Willis signed an arbitration agreement in connection with the April 2017 transaction; she did not sign an arbitration agreement in connection with the March 2017 transaction.

Willis sued Setjo, claiming that the March 2017 retail installment contract violated the Truth in Lending Act. She also alleged that she was fraudulently induced into signing the April 2017 arbitration agreement and that Setjo waived its right to enforce the arbitration agreement. Setjo moved to dismiss or, in the alternative, to stay the action pending arbitration.

First, the federal trial court found that Setjo had not waived its right to enforce the arbitration agreement and that Willis’s execution of the arbitration agreement was not fraudulently induced. Then the court addressed Setjo’s argument that the April 2017 arbitration agreement applied retroactively to the March 2017 agreements.

The arbitration agreement stated that it applied to all claims arising from the purchase and financing of the vehicle and “any document or relationship established in this transaction or related transactions regardless of whether the transactions were consummated.” Setjo argued that the March 2017 agreements were “related transactions” covered by the April 2017 arbitration agreement.

The court disagreed. The court found that the April 2017 transaction was separate and independent from the March 2017 transaction. The March 2017 contracts were executed and “voided,” and the vehicle covered by those contracts was returned to Setjo, before the arbitration agreement was ever signed. There was also no evidence that Willis or Setjo intended for the March 2017 agreements to be subject to a later-signed arbitration agreement.

Therefore, the court concluded that the TILA claims arising from the March 2017 transaction were not arbitrable. The court also concluded that all claims arising from the April 2017 transaction (which the court did not identify) were subject to arbitration and were, therefore, dismissed. The TILA claim arising from the March 2017 transaction was stayed pending the completion of the arbitration.

How would your documents perform under an analysis like this?

Lesson No. 2: Beware Dueling Arbitration Clauses.

It isn’t uncommon for several documents used in the sale and financing of a vehicle to contain arbitration clauses. What happens if those clauses differ from each other?

Shaina Stanley sued A Better Way Wholesale Autos Inc., for violating the Truth in Lending Act and Connecticut’s Unfair Trade Practices Act by charging her for several services in connection with her used-car purchase that were not properly disclosed to her and that she did not want. Better Way moved to compel arbitration before the American Dispute Resolution Center.

The parties’ purchase order provided that binding arbitration shall be provided by ADRC. The parties’ installment contract provided that Stanley may choose the American Arbitration Association or any other organization to conduct the arbitration, subject to Better Way’s approval.

Prior to suing, Stanley submitted a demand for arbitration to AAA seeking damages from Better Way. AAA advised Better Way’s counsel that Better Way was required to submit its consumer agreement for expedited review and to AAA’s database and was required to pay fees associated with those submissions, as well as filing fees and a deposit for the arbitrator. Better Way failed to pay the required fees after numerous requests, so AAA closed the arbitration and requested that Better Way remove AAA’s name from its arbitration provision due to its failure to comply with AAA’s policies.

The federal trial court found that the arbitration provisions in the purchase order and the retail installment contract must be read together because the documents were executed on the same day and related to the same purchase transaction. The court noted that because the two documents provided by Better Way named two different arbitration organizations, that conflict must be construed in Stanley’s favor.

Because Stanley submitted an arbitration demand to AAA, the court concluded that AAA is the proper arbitration panel. However, because Better Way failed to pay required fees, it waived its right to arbitrate. Therefore, the court denied Better Way’s motion to compel arbitration.

Go check your deal documents and count the arbitration clauses they contain. If you get to “more than one,” go talk to your lawyer.

Lesson No. 3: Arbitrators May Make Decisions You Don’t Like.

Some say that using an arbitration clause in connection with selling and financing a vehicle is a good way to avoid fronting courts that may be hostile to car dealers. Arbitrators can be hostile too!

Shannon Gause bought a used 2004 Cadillac SRX from A Better Way Wholesale Autos Inc. Afterward, Gause learned that Better Way had failed to disclose to her that the vehicle was a manufacturer buyback. Gause brought an arbitration claim against Better Way.

The arbitrator concluded that Better Way violated state laws and regulations by not disclosing, on a windshield sticker or other conspicuous display and in the purchase order, the vehicle’s status as a buyback. The arbitrator awarded Gause $1,279 in compensatory damages, $5,000 in punitive damages, and $10,817 in attorneys’ fees and costs for Better Way’s violation of the Connecticut Unfair Trade Practices Act.

After a court confirmed the award, Better Way appealed, claiming that the punitive damages award constituted a manifest disregard of the law. The Appellate Court of Connecticut disagreed and affirmed the award.

The appellate court began by noting that an award of punitive damages under the CUTPA is discretionary. The appellate court then stated that the arbitrator concluded that Better Way’s failure to notify Gause of the buyback status of her car constituted a per se violation of the CUTPA and that Better Way agreed with the arbitrator’s conclusion.

The arbitrator also noted that Better Way restricted Gause from testing the vehicle, induced her to execute the purchase documents before inspection, and attempted to deliver a vehicle that failed to meet safety standards. Given the extent of Better Way’s actions, which the arbitrator concluded constituted a “reckless indifference of [Gause’s] rights,” the appellate court found that the arbitrator was justified in awarding punitive damages.

Arbitration isn’t a failsafe against being hit with punitive damages or outsized awards to car buyers — you still must avoid business practices that an arbitrator would not find offensive.

Thomas B. Hudson is a partner in the firm of Hudson Cook LLP, publisher of Spot Delivery, and the author of several widely read compliance manuals. Contact him at [email protected]. ©CounselorLibrary.com 2018, all rights reserved. Single print publication rights only, to Auto Dealer Today (10/18). HC No. 4817-1508-4148