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)
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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
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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
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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
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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
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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
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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.
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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.)
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