APPEALS from a judgment and order of the Superior Court of San Diego County, John S. Meyer, Judge. Affirmed in part, reversed in part and remanded with directions. (Super. Ct. No. GIC881178).
The opinion of the court was delivered by: McINTYRE, J.
CERTIFIED FOR PUBLICATION
In this case, Pearson Ford Co., an automobile dealer, backdated a contract it had entered into with Reginald Nelson, the vehicle buyer. Backdating the contract rendered inaccurate the disclosed annual percentage rate (APR), and resulted in Nelson paying interest for a time period that no contract existed. Pearson Ford also failed to list in the contract Nelson's purchase of automobile liability insurance, and erroneously added the insurance premium to the sales price of the vehicle.
Nelson sued Pearson Ford alleging violations of the Automobile Sales Finance Act (ASFA) (Civ. Code, § 2981 et seq.), California's unfair competition law (UCL) (Bus. & Prof. Code, § 17200 et seq.), and the Consumers Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq.) (All undesignated statutory references are to the Civil Code.) The trial court certified the matter as a class action, with two classes: the backdating class and the insurance class. After a bench trial, the trial court found Pearson Ford not liable under the ASFA to the backdating class, but liable under the ASFA to the insurance class. It also found Pearson Ford liable to both classes under the UCL, but not the CLRA. The trial court issued certain remedies under the ASFA and the UCL, and awarded Nelson his attorney fees and costs under the ASFA. Both parties appeal.
Nelson asserts the trial court erred in finding Pearson Ford not liable to the backdating class under the ASFA, and not liable under the CLRA. Nelson also contends the trial court erred in the remedies it awarded under the UCL. On cross-appeal, Pearson Ford asserts it complied with the ASFA as to both classes, the class representative (Nelson) lacked standing under the UCL, and the trial court erred in the remedies it awarded under the ASFA and the UCL. Pearson Ford also contends the trial court erred in finding the Code of Civil Procedure section 998 offer it made to Nelson invalid; accordingly, it asserts that the attorney fee and costs award should be reversed.
We conclude that the portion of the judgment finding Pearson Ford not liable to the backdating class under the ASFA and the CLRA must be reversed. We agree with Pearson Ford that the trial court erred in the remedies it awarded under the ASFA and the UCL, and that the court erred in issuing a permanent injunction under the UCL as to the insurance class. We agree with Nelson that the portion of the judgment returning to Pearson Ford any sums remaining after the payment of all valid claims must be reversed, and direct the trial court to comply with Code of Civil Procedure section 384 as to both classes. We remand the matter to determine, consistent with the views expressed in this opinion, appropriate statutory remedies for: both classes under the ASFA; the insurance class under the ASFA and the UCL; and the backdating class under the CLRA. Finally, we agree with the trial court's conclusion regarding the invalidity of Pearson Ford's Code of Civil Procedure section 998 offer.
FACTUAL AND PROCEDURAL BACKGROUND
Nelson agreed to purchase a used 1998 Infiniti 130 (the car) from Pearson Ford for $9,995. On October 2, 2004, Nelson submitted a credit application, and Pearson Ford prepared a conditional sale or retail installment sale contract (the original contract) for Nelson's signature. (All undesignated dates are in 2004.) That same day, Nelson signed the original contract and took possession of the car. Under the original contract, Pearson Ford had the right to rescind the transaction within 10 days if it could not sell Nelson's loan to an institutional lender.
At the time of the purchase, Nelson did not have automobile insurance. Pearson Ford contacted an insurance broker who came to the dealership to sell Nelson an insurance policy. Nelson signed a "Due Bill" stating that he agreed to purchase the insurance for $250, and that the price of the insurance was "included in the total price of $10,245.00 as shown on line 1(A) of my contract."
On October 8, Pearson Ford called Nelson and asked him to return to the dealership to fill out more paperwork, which Nelson did the same day. Nelson signed an "Acknowledgment of Rewritten Contract" stating that the original contract date was October 2, but that "the original contract... has been mutually rescinded and no longer has any legal effect," and the rewritten contract date was October 8. The Acknowledgment stated that, under the rewritten contract, the term of the loan, the monthly payment, and the total finance charges had changed in a certain amount. The Acknowledgment also stated: "I understand I am entitled to a complete refund of all consideration previously paid by me... " and "I hereby freely and voluntarily elect to enter into a different contract for the purchase of the vehicle...."
On October 8, plaintiff signed a second retail installment sale contract (the second contract) consistent with the agreed-upon terms listed in the Acknowledgement. The parties backdated the second contract to October 2, the date they signed the original contract.
The original contract and the second contract listed the APR as 21 percent. However, interest started accruing on the second contract on October 2, six days before the parties signed it. This made the 21 percent APR listed in the second contract inaccurate. Because the parties signed the second contract on October 8, this decreased the actual number of days to the first payment due date from 45 to 39 days, making the correct APR 21.23 percent. The interest for those six days (October 2 to October 8) was $19.53, and the interest over the 36-month loan period on that figure was $7.47. Thus, Nelson paid an additional $27 finance charge. The second contract disclosed the total finance charge as $2,082.36, which included the $27, but the $27 was not separately itemized.
Additionally, both contracts improperly added the $250 insurance premium to the cash price of the car. This mistake caused Nelson to erroneously pay $30 in additional sales tax and financing charges on the insurance premium.
On March 2, 2007, Nelson filed this class action alleging that Pearson Ford violated the ASFA, the UCL, and the CLRA as to two classes of individuals. Class 1 (the backdating class) consisted of: "All persons who between March 2, 2003, and March 27, 2008, (1) purchased a vehicle from Pearson Ford Co. for personal use, and (2) on a later date executed an Acknowledgment of Rewritten Contract, and (3) signed a subsequent or second contract for the purchase of the same vehicle, which contract was dated the date of the original purchase contract and involved financing at an annual percentage rate greater than 0.00%." Class 1 had about 1,500 members. Class 2 (the insurance class) consisted of: "All persons who between March 2, 2003, and March 27, 2008, executed a Retail Installment Sale Contract with Pearson Ford Co. that included in the 'Cash Price of Motor Vehicle' on Line 1.A.1 of the contract the cost of insurance." Class 2 had about nine members.
On the first day of trial, the parties agreed there were no triable issues of material fact. Accordingly, the court indicated it would revisit previously filed motions for summary judgment or adjudication. The parties then tried this matter to the court based on certain stipulated documents and facts. The court ultimately concluded that there were no triable issues of material fact.
The trial court entered judgment finding no violation of the CLRA. Although it found a "technical violation" of the ASFA as to the backdating class, it determined that Pearson Ford substantially complied with the ASFA, and denied any relief to the backdating class under the ASFA. Nevertheless, the court found Pearson Ford liable to the backdating class under the UCL, granted injunctive relief and set restitution in the amount of $50 per class member. For the insurance class, the court found that Pearson Ford violated the ASFA and the UCL by failing to disclose the cost of insurance and adding the insurance cost to the cash price of the car. It also enjoined Pearson Ford from adding the price of insurance to the cash price of a vehicle in the future. Both parties appealed. The trial court granted Nelson's motion for attorney fees and costs in the amount of $368,418.50 and $8,453, respectively. It denied Pearson Ford's motion for attorney fees and costs. The trial court later granted Nelson additional attorney fees and costs in the amount of $21,144.50 and $3,342.60, respectively. Pearson Ford also appeals those orders. We granted the application of the California New Car Dealers Association to file an amicus curiae brief on behalf of Pearson Ford.
We address the appeals simultaneously because they present intertwined arguments regarding liability under the ASFA, the UCL, and the CLRA. We separately discuss the federal Truth in Lending Act (TILA, 15 U.S.C. § 1601 et seq.) as this legislation serves as a backdrop for liability under the ASFA.
The parties do not contest the trial court's conclusion that there were no triable issues of material fact; rather, they dispute the trial court's application of the various statutes to the facts. We independently review the interpretation of the governing statutes, and application of the statutes to the undisputed facts. (City of Saratoga v. Hinz (2004) 115 Cal.App.4th 1202, 1212.)
The purpose of the TILA is to assure consumers a meaningful disclosure of credit provisions, enabling the consumer to compare more readily various available credit terms and to avoid the uninformed use of credit. (Mourning v. Family Publications Service, Inc. (1973) 411 U.S. 356, 364.) To effectuate its purposes, the TILA delegated broad regulatory and rulemaking power to the Federal Reserve Board. (15 U.S.C. §§ 1602(a) & 1604; see Bone v. Hibernia Bank (9th Cir. 1974) 493 F.2d 135, 138.) Acting under this authority, the Federal Reserve Board issued Regulation Z. (12 C.F.R. § 226.1 et seq.) Courts have strictly enforced the requirements of the TILA and those of Regulation Z to promote the TILA's purpose of protecting consumers. (Fairley v. Turan-Foley Imports, Inc. (5th Cir. 1995) 65 F.3d 475, 479-480.)
The TILA requires a lender to disclose, among other things, the amount financed, the finance charge, and the APR. (15 U.S.C. § 1638.) In turn, Regulation Z sets out certain guidelines for creditors to follow when disclosing this information to the consumer. (12 C.F.R. §§ 226.18 & 226.22.) Regulation Z defines the APR as "a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made." (12 C.F.R. § 226.22(a)(1).) As "the single most useful disclosure mandated by the Act," the APR "is a derived figure, calculated from (i) the amount of the finance charge, (ii) the amount of credit extended, and (iii) the term of the extension of credit - the time period between the date interest starts accruing and the date of the last payment." (Krenisky v. Rollins Protective Services Co. (2nd Cir. 1984) 728 F.2d 64, 66 (Krenisky).) Under the TILA and Regulation Z, the disclosed APR must be accurate to within 0.125 percent of the properly calculated APR. (15 U.S.C. § 1606(c); 12 C.F.R. § 226.22(a)(2).)
The time between the date the contract takes effect and the first payment is called "the first period." (12 C.F.R. § 226.17(c)(4).) As the Krenisky court explained, changing the length of the first period alters the APR: "If the transaction date and the accrual date do not coincide, the effective interest rate will be lower than the rate derived from the transaction date if the accrual date is later, and higher if the accrual date is earlier. If two creditors claim to be charging identical annual rates but one commences accruing finance charges months prior to the date of the transaction, he charges a higher effective annual rate although the disclosed rates are identical." (Krenisky, supra, 728 F.2d at p. 66.) When calculating the APR under Regulation Z, "[t]he term of the transaction begins on the date of its consummation, except that if the finance charge or any portion of it is earned beginning on a later date, the term begins on the later date." (12 C.F.R. Pt. 226 App. J(b)(2).) Consummation is defined as "the time that a consumer becomes contractually obligated on a credit transaction." (12 C.F.R. § 226.2(a)(13).) Several courts have decided that accrual dates prior to the date of consummation are prohibited. (Krenisky, supra, 728 F.2d at p. 67, fn. 3; Rucker v. Sheehy Alexandria, Inc. (E.D. Va. 2002) 228 F.Supp.2d 711, 717 (Rucker I).)
In Rucker I, a federal district court addressed a situation factually on all fours with the present action. In that case, the plaintiff had engaged in a "spot delivery" transaction for a car, whereby she executed a retail installment sales contract, buyer's order, and bailment agreement on April 3, and took possession of the car. (Rucker I, supra, 228 F.Supp.2d at p. 713.) The buyer's order and bailment agreement made clear that the transaction was a spot delivery, because the sale was contingent upon receiving financing within five days of the agreement. (Ibid.) The dealer was able to secure financing only under different terms, and the plaintiff returned to the dealership on April 13, to sign a second agreement that incorporated the new terms. (Id. at pp. 713-714.) The court found that the transaction was consummated, in accordance with the TILA and Regulation Z, "not when the consumer [took] possession of the product, but at the 'time that [the] consumer [became] contractually obligated on a credit transaction' [citations]." (Id. at p. 716.) Based on the April 13 consummation date, the court concluded that the APR disclosed in the April 13 contract was inaccurate because it had been improperly calculated from April 3, the nominal date of the April 13 agreement. (Id. at pp. 716-717.) Using the improper accrual date of April 3 in the April 13 agreement violated the TILA because it led to a disclosed APR of 24.95 percent, whereas a properly calculated APR, using an accrual date of April 13, was 25.35 percent. (Id. at p. 717.) The difference in the APRs was 0.4 percent, which was outside the 0.125 percent tolerance allowed by the TILA. (Ibid.)
Although the Rucker I court noted that this seemed "to be no more than a minor technical error," it awarded statutory damages for the improper disclosure of the APR. (Rucker I, supra, 228 F.Supp.2d at p. 717.) The court stated that: "Even if consumers were aware of the sensitivity of the APR to changes in interest accrual dates, they would need to perform complex calculations to gauge the difference between the APR calculated on the nominal date of a backdated agreement versus the actual date of consummation. There is no reason for consumers to bear this burden. The implementing regulations simplify matters by prohibiting earlier accrual dates which would result in understated APRs. This renders the disclosures more comparable and helps to 'assure a meaningful disclosure' of the APR. [Citation.]" (Id. at p. 718.) The court stated that if the automobile dealer wanted "to recover payment from the consumer for the use of the car prior to the second agreement, it should explicitly provide for some rent to be paid for this time period in the original conditional contract." (Id. at p. 719, fn. omitted.)
The Rucker I court revisited its opinion on the automobile dealer's motions to amend the judgment or for relief from judgment. (Rucker v. Sheehy Alexandria, Inc. (E.D. Va. 2003) 244 F.Supp.2d 618, 620 (Rucker II).) In Rucker II, the court rejected the automobile dealer's argument that the use of April 3 in calculating the disclosed APR was proper because the parties agreed that April 3 was the effective date of the agreement, stating the argument simply could not "be squared with the requirements of Regulation Z." (Id. at p. 623.) The court emphasized that the inaccurately stated APR violated the TILA, not the backdating of the second contract. (Id. at p. 626.)
The California Legislature enacted the ASFA in 1961 with an operative date of January 1, 1962 to increase protection for the unsophisticated motor vehicle consumer and provide additional incentives to dealers to comply with the law. (Stats. 1961, ch. 1626, pp. 3534-3541; Cerra v. Blackstone (1985) 172 Cal.App.3d 604, 608.) The ASFA serves to protect motor vehicle purchasers from abusive selling practices and excessive charges by requiring full disclosure of all items of cost. (Stasher v. Harger-Haldeman (1962) 58 Cal.2d 23, 29 (Stasher)). Under the ASFA, every conditional sale contract must contain "in a single document all of the agreements of the buyer and seller with respect to the total cost and the terms of payment for the motor vehicle, including any promissory notes or any other evidences of indebtedness." (§ 2981.9, the single document rule.) Conditional sale contracts must also contain all disclosures and notices required under section 2982, in addition to the disclosures required by Regulation Z. (§ 2982.)
Subdivision (a) of section 2982 requires certain disclosures, which must be labeled "itemization of the amount financed," including, among other things, the cash price, the total cash price (which is the sum of other required disclosures), the amount of any insurance premiums included in the contract, the amount financed, and "[t]he amount of any administrative finance charge, labeled 'prepaid finance charge.'" (§ 2982, subds. (a)(1)(A), (a)(1)(L), (a)(3), (a)(7) & (a)(8).) "The disclosures required by subdivision (a) [of section 2982] may be itemized or subtotaled to a greater extent than as required by that subdivision and shall be made together and in the sequence set forth in that subdivision." (§ 2982.)
The trial court found Pearson Ford not liable for a violation of the ASFA, stating that "although [Pearson Ford's] conduct constituted technical violations of Civil Code §§ 2981.9 [the single document rule], 2982, 2982(a), and 2982(a)(7), the [Contract] at issue was facially accurate and agreed to by the parties, and therefore, [Pearson Ford] substantially complied with [the ASFA]." Nelson contends the trial court erred when it found that Pearson Ford had substantially complied with the ASFA, and that Pearson Ford should be found liable to the backdating class under the ASFA. On cross-appeal, Pearson Ford asserts it fully complied with the ASFA as a matter of law, but even assuming it did not, it substantially complied. As we shall explain, we agree that Pearson Ford violated the disclosure requirements of subdivision (a) of section 2982, and the single document rule as to both classes. These violations rendered the second contract unenforceable under section 2983.
As a threshold matter, Nelson argues that Pearson Ford's violation of Regulation Z rendered the second contract unenforceable. While we agree that Pearson Ford violated Regulation Z, this violation does not render the contract unenforceable under the ASFA.
"Section 226.22(a) of Regulation Z provides that the annual percentage rate for other than open end credit transactions shall be determined in accordance with either the actuarial method or the United States Rule method." (12 C.F.R. Pt. 226(a)(1), App. J (2010).) "The term of the transaction begins on the date of its consummation." (12 C.F.R. Pt. 226(b)(2), App. J (2010).) "Consummation means the time that a consumer becomes contractually obligated on a credit transaction." (12 C.F.R. § 226.2(a)(13); see, Veh. Code, § 5901, subd. (d) ["A sale is deemed completed and consummated when the purchaser of the vehicle has paid the purchase price, or, in lieu thereof, has signed a purchase contract or security agreement, and has taken physical possession or delivery of the vehicle"].)
Thus, Regulation Z requires that the APR be calculated from the date the consumer becomes obligated, not the date the consumer makes the down payment and drives the car away. (Rucker I, supra, 228 F.Supp.2d at p. 717.) Additionally, Regulation Z mandates that the disclosed APR be accurate to within 0.125 percent of the properly calculated APR. (12 C.F.R. § 226.22(a)(2).) The first unlettered paragraph of section 2982 incorporates Regulation Z into the ASFA, stating: "A conditional sale contract subject to this chapter shall contain the disclosures required by Regulation Z, whether or not Regulation Z applies to the transaction."
Here, Pearson Ford used the actuarial method to improperly calculate the APR from the day Nelson took possession of the car. Using the improper consummation date of October 2, the second contract listed the APR as 21 percent, use of the correct consummation date of October 8 results in an APR of 21.23 percent. The 0.23 difference exceeded the 0.125 percent tolerance allowed by Regulation Z. (15 U.S.C. § 1606(c); 12 C.F.R. § 226.22(a)(2).) Thus, Pearson Ford failed to comply with Regulation Z.
Pearson Ford's violation of Regulation Z, however, does not render the second contract unenforceable. The Legislature added a reference to Regulation Z to section 2982 in 1981 (Stats. 1981, ch. 1075, p. 4125, § 14, operative Oct. 1, 1982), to bring the ASFA and several other statutes, into conformity with federal disclosure requirements. (Historical and Statutory Notes, 9B West's Ann. Civ. Code (2009 ed.) foll. § 1803.2, p. 200.) The Legislature simultaneously amended sections 2983 and 2983.1, but failed to specify that a failure to comply with Regulation Z would also render the contract unenforceable. (Stats. 1981, ch. 1075, pp. 4132-4133 §§ 18, 19, operative Oct. 1, 1982.) Under section 2983, only violations of section 2981.9, or subdivisions (a), (j), or (k) of section 2982, make the contract unenforceable. The language of these statutes is clear that only the violation of specific disclosure requirements renders the contract unenforceable.
While Nelson questions the wisdom of requiring compliance with Regulation Z, but not affording a remedy to the consumer when a dealer fails to comply, we cannot say that the failure to afford a remedy resulted from a legislative oversight. Rather, it appears that the failure to provide a remedy for a violation of Regulation Z was deliberate. In any event, as we shall discuss, Pearson Ford violated section 2981.9 and subdivision (a) of section 2982, which do provide a remedy.
Nelson argues that Pearson Ford violated the disclosure requirements of subdivision (a) section 2982 because it failed to separately itemize the $19.53 in pre-consummation interest in the second contract, and this violation rendered the second contract unenforceable. He admits, however, that pre-consummation interest is not listed as a required disclosure in the "itemization of the amount financed" set forth in subdivision (a) of section 2982. Nonetheless, relying on Thompson v. 10,000 RV Sales, Inc. (2005) 130 Cal.App.4th 950 (Thompson), he contends pre-consummation interest is an illegal charge and that Pearson Ford cannot escape liability because the contract does not contain a separate line for it to disclose this illegal charge. We agree.
In Thompson, the trial court found violations of the ASFA, the UCL, and the CLRA, and issued a permanent injunction against a dealer prohibiting it from including over-allowances on trade-in vehicles in the cash price of the vehicles it sold. (Thompson, supra, 130 Cal.App.4th at p. 963.) An over-allowance is "'the difference in the amount owed and the actual cash value of a trade-in vehicle.'" (Lewis v. Robinson Ford Sales, Inc. (2007) 156 Cal.App.4th 359, 362.) The buyer in Thompson owed more on the traded-in vehicle than what the vehicle was worth, resulting in negative equity in the sales transaction. (Thompson, supra, at p. 977.) In Thompson we addressed the narrow issue of the propriety of the permanent injunction. (Ibid.) We agreed that the dealer had violated the ASFA by incorrectly disclosing the cash price of the vehicle, the value of the traded-in vehicle, and the total down payment as required by subdivisions (a)(1)(A), (a)(6)(C), and (a)(6)(G) of section 2982, respectively. (Thompson, supra, at pp. 972, 978-979.)
Significantly, the contract in Thompson contained all the disclosures required by subdivision (a) of section 2982. Nonetheless, we concluded that the contract violated the ASFA because the dealer had manipulated the numbers that the ASFA required it to disclose in a manner that hid negative equity and deceived the consumer. (Thompson, supra, 130 Cal.App.4th at pp. 973, 977, & 979, fn. 21.) In doing so, we rejected the dealer's argument that the contract did not have a line entitled "over-allowance" on which it could disclose the amount. We concluded that "creating an over-allowance by artificially inflating the true value of a trade-in vehicle to eliminate negative equity solely to obtain financing results in an unlawful credit practice under the ASFA." (Id. at p. 979, fn. 21.) We noted that the disclosure requirements of the ASFA protect against "inaccurate and unfair credit practices." (Id. at 979, italics in original.)
Similarly here, the second contract contained all the disclosures required by subdivision (a) of section 2982, including the amount financed. (§ 2982, subd. (a)(8).) However, Pearson Ford's act of backdating the second contract resulted in Nelson paying a finance charge before consummation of the contract. (See Regulation Z; Veh. Code, § 5901, subd. (d).) Accordingly, the backdating of the second contract caused Nelson to pay ...