BILL ANALYSIS SENATE JUDICIARY COMMITTEE Senator Ellen M. Corbett, Chair 2007-2008 Regular Session SB 729 S Senator Padilla B As Amended April 18, 2007 Hearing Date: April 24, 2007 7 Vehicle Code 2 ADM:jd 9 SUBJECT Vehicles: Dealers: Consumer Protection; Consumer Recovery Fund DESCRIPTION This bill would create the Consumer Motor Vehicle Recovery Corporation (CMVRC) and the Consumer Recovery Fund (CRF), with a board of directors with certain powers and duties, in order to provide payments to consumers on specified eligible claims when a vehicle dealer: (1) fails to remit license or registration fees; (2) fails to pay off a trade-in's sale or lease balance owed or; (3) fails to make payment on a consignment sale agreement. Eligible claims would include claims where the dealer/lessor has ceased selling or leasing vehicles or is in bankruptcy. [See Comment 3 for details.] This bill would require the Department of Motor Vehicles (the department) to charge a fee, as specified, for each vehicle sold or leased. The fee would be transmitted to the CMVRC and deposited in the CRF. A dealer would be prohibited from charging or collecting the fee from a consumer. [See Comment 3 for details.] This bill would provide that, as specified, the department may, among other things, refuse to issue a license to a dealer, or suspend or revoke a dealer's license for violation of the bill's provisions. (This analysis reflects author's amendments to be offered (more) SB 729 (Padilla) Page 2 in committee.) BACKGROUND Currently, when a consumer purchases or leases a vehicle and trades-in another vehicle, part of the sale or lease agreement is that the dealer or lessor-retailer will pay the license and registration fees on the purchased or leased vehicle, and will pay off the loan or lease on the trade-in vehicle. In addition, when a dealer takes in a vehicle on consignment and then sells the consigned vehicle, the dealer is obligated to pay the consumer pursuant to the consignment agreement. The author and sponsor of this bill state that often when a dealer or lessor-retailer goes out of business or enters bankruptcy, that dealer or lessor-retailer fails to meet its obligations to the consumer, including failure to pay license and registration fees, balances due on trade-ins, and payments due pursuant to a consignment agreement. This bill would create a consumer restitution fund to address these problems. CHANGES TO EXISTING LAW Existing law imposes a number of licensing and regulatory requirements on vehicle dealers, manufacturers, distributors, and transporters. The Department of Motor Vehicles (the department) generally governs vehicle dealers, manufacturers, distributors, and transporters. [Vehicle Code (VC) Section 11700 et seq.] Existing law provides, as specified, that a violation of the above provisions is a crime, generally punishable as a misdemeanor. [VC Sections 40000.11, 42002, 40007.] This bill would establish the Consumer Motor Vehicle Recovery Corporation (CMVRC), with a board of directors with certain specified powers and duties, in order to provide payments to consumers on specified eligible claims, as a result of the failure of a licensed dealer or lessor-retailer to do any of the following: (1) remit license or registration fees received or contractually obligated to be paid from a consumer to the department; (2) pay to a lessor or legal owner of a vehicle transferred SB 729 (Padilla) Page 3 as a trade-in the amount necessary to discharge the prior credit or lease balance owed to the lessor or legal owner; or (3) pay the amount specified in a consignment agreement to a consumer after the sale of a consigned vehicle. (See Comment 3 for details.) This bill would require the department to charge a dealer or retailer lessor a $1 fee for each vehicle sold or leased. The fee would be transmitted to the CMVRC and deposited in the CRF. A dealer would be prohibited from charging or collecting the fee from a consumer. (See Comment 3 for details.) This bill would provide that, as specified, the department may, among other things, refuse to issue a license to a dealer, or suspend or revoke a dealer's license for violation of the bill's provisions. This bill would define certain specified terms for purposes of the bill's provisions. This bill would make findings and declarations related to the economic loss suffered by consumers when a dealer or lessor-retailer fails to make certain payments it is obligated to under the law. COMMENT 1. Stated need for the bill The author and sponsor write: Consumers who trade in their vehicles when purchasing or leasing a new vehicle often owe an outstanding credit balance on the trade-in. The express or tacit understanding between the consumer and the dealer is that the dealer will timely pay off the credit balance or lease balance owed on the trade-in so that the consumer will incur no further charges, including late charges. That understanding is reflected in the contract for the replacement vehicle; the law requires that the sales or lease contract for the replacement vehicle set forth the value of the trade-in and the outstanding principal or lease balance owed on the vehicle, and the net amount is calculated into the new SB 729 (Padilla) Page 4 purchase transaction. Typically, however, the contract does not specify any period for paying off the liens. Unscrupulous dealers may not timely pay the balance, and consumers remain liable on the old contract while having to make payments for the replacement vehicle. In addition, some dealers also fail to remit to the state vehicle license and registration fees paid to the dealer by consumers, and consumers are thus unable to register their vehicles. Moreover, some dealers who sell vehicles on consignment for consumers fail to pay consumers the sale proceeds. If the dealers who engage in these practices are insolvent, consumers are unable to recover money directly from the dealers and thus incur substantial financial loss. The existing dealer bond is inadequate to address the problem because (1) the amount of the bond is too small to compensate for all losses, (2) the bond covers various losses including the state's loss of vehicle license and registration fees and sales taxes which have a first priority claim on bond funds, (3) consumers may have to institute costly litigation to enforce payment on the bond, and (4) the surety insurer issuing the bond may file an interpleader action allowing the surety insurer to deduct litigation expenses thereby reducing the total amount of bond funds available to pay claims. 2. Examples of dealers under investigation or prosecution The author and sponsor provide the following examples of dealerships under investigation or prosecution for failure to pay license or registration fees, failure to pay off loans on trade-ins, or failure to pay off a consigned vehicle: Solano County dealership [names have not been provided while investigations are pending]: currently being investigated by Solano County District Attorney (DA); more than 100 victims, and more than $1 million in losses. Alameda County dealership: Currently being investigated by Alameda County DA; 50 victims and SB 729 (Padilla) Page 5 losses in excess of $1 million. Riverside County dealership: Riverside County DA; 6 victims; $50,000 in losses. This case was prosecuted criminally when the dealer sold trade-in vehicles that were still encumbered with unpaid liens to new consumer buyers. Placer County dealership: Placer County DA; 8 victims; $50,000 in losses. The company declared bankruptcy, and obtained a discharge of the obligations to the victims. Marin County dealership: Marin County DA; 50 complainants, and many more victims. The DA was able to assist the consumers in negotiating a resolution. For example, Nissan Credit agreed to release their liens on cars which were not paid off. Marin County dealership: Marin County DA; losses of approximately $100,000. Monterey County dealership: Monterey County DA; more than 80 victims; more than $1 million in losses. 3. Consumer Motor Vehicle Recovery Corporation (CMVRC) and Consumer Recovery Fund (CRF); dealer fee structure a. CMVRC/CRF The bill would create the CMVRC, which would administer the CRF. The CMVRC would be organized as a nonprofit mutual benefit corporation under the Corporations Code. The CMVRC would be composed of six directors as follows: One public consumer appointed by the Department of Consumer Affairs; One employee of the Department of Justice assigned by the Attorney General (ex officio, nonvoting member); and Four licensed dealers/lessor-retailers, as SB 729 (Padilla) Page 6 defined and conditioned. The bill would require the CMVRC to establish the CRF to provide consumers eligible claim payments, as defined and specified. The bill would provide the claims application process for eligible consumer claims where the dealer/lessor has ceased selling or leasing vehicles or is in bankruptcy. An "eligible claim" would mean an unsatisfied claim for economic loss, not barred by the statute of limitations, that accrues after July 1, 2008, as a result of the failure of a licensed dealer or lessor-retailer to do any of the following: (1) remit license or registration fees received or contractually obligated to be paid from a consumer to the department; (2) pay to a lessor or legal owner of a vehicle transferred as a trade-in the amount necessary to discharge the prior credit or lease balance owed to the lessor or legal owner; or (3) pay the amount specified in a consignment agreement to a consumer after the sale of a consigned vehicle. The CMVRC would be subject to a number of specified requirements regarding fund management, accounting and reporting, including quarterly reports to the Attorney General's Office, Consumer Law Section. b. Dealer fee structure The bill would provide that the department shall collect from dealers and lessor-retailers $1 for each vehicle sale or lease, and upon appropriation, the fees shall be paid to the CMVRC, as provided, until the CMVRC notifies the department that the CRF has reached $5 million. Thereafter, if the amount in the CRF is less than $2 million, the CMVRC shall notify the department of the amount necessary to return the recovery fund to $5 million, and the department shall collect the fee only as necessary to maintain the fund at the $5 million level. The CMVRC would be required to reimburse the department for all reasonable expenses incurred. 4. Bill would allow a denied claimant to seek court review of the denial SB 729 (Padilla) Page 7 The bill would provide that, if an applicant's claim is denied, he or she may seek review in the superior court. The review would be limited to the written record before the CMVRC, and any relevant evidence that could not have been previously presented to the CMVRC despite the applicant's reasonable diligence. 5. Bill would provide certain penalties for a violation of its provisions This bill would extend penalties available under current law to a violation of the provisions of this bill. These would include allowing the department to refuse to issue a dealer license, and revoke or suspend a dealer's license. 6. Bill's provisions would mirror those of a successful similar restitution fund for travel consumers The author, sponsor, and supporters note that the provisions of this bill are substantially similar to an established restitution fund (administered by the Travel Consumer Restitution Corporation) for travelers who have sustained economic losses because a "seller of travel" failed to refund payments where such refunds are due, as specified. [See Business and Professions Code Sections 17550.35-17550.58.] The sponsor provides that this restitution fund "model has worked successfully and efficiently in other contexts such as the Travel Consumer Restitution Corporation funded by industry fees that have returned more than $2.2 million to consumers with relatively minimal administrative expense. The existence of these funds not only benefits the public, but also benefits responsible industry members by elevating public confidence in the integrity and reliability of the industry. ? the recovery fund is much cheaper than other means of protecting the public against loss, such as a requirement for a large bond." 7. Author's amendments On page 14, delete lines 26-31. SB 729 (Padilla) Page 8 Support: CA Motor Car Dealers Association; Office of the Attorney General Opposition: None Known HISTORY Source: CA District Attorneys Association Related Pending Legislation: None Known Prior Legislation: SB 663 (Figueroa of 2000), which was similar in a number of ways to this bill, would have, among other things, established a Motor Vehicle Recovery Fund. The fund, which would have been administered by the department, would have allowed consumers to file eligible claims, as defined, to recoup economic losses suffered because of a dealer or lessor's failure to make specified obligated payments. (This bill died in Assembly Appropriations Committee.) **************