Published June 9, 2015, Dealer’s Voice – Closing a sale that involves a trade is one of the cornerstones of the car business. And taking a trade may not only be necessary, but it can also greatly enhance the financial aspect of the deal. Many consumers are willing to give away their old vehicles to get in something fresh and new. And when a trade is taken in far below market value, a significant margin can be made on resale, whether it is at retail or at auction.

California’s Retail Installment Sales Contracts give the dealer the right to cancel the contract if the dealer is unable to sell the paper within 10 days of the contract. If the consumer is able to be financed, all parties are happy. But what happens when the dealer cannot find financing, and the consumer wants their trade returned? Real issues arise when the trade is no longer available because it has already been sold.

California Civil Code § 2982.7 states that when a trade has been sold, the dealer is required to give the consumer the greater of what the dealer sold the car for, or its fair market value. This could result in a substantial financial hit for the dealer, particularly if the trade was wholesaled for less than fair market value. If the dealer fails to tender payment to the consumer within five days of rescinding the deal, the consumer can bring a civil claim against the dealer, which can include a claim for attorneys’ fees incurred in bringing the claim. And this is where the tail wags the dog.

Many a dealer have discovered the hard way that refusing to refund the consumer top dollar for their trade can end up costing tens of thousands of dollars in attorneys’ fees in litigated claims. And there are countless predatory law firms in California that make their living off of suing dealers for nominal claims, only to recover the statutory attorneys’ fees.

To make matters worse, even when the value of the car is tendered to the consumer, the dealership could still have a problem on its hands. When a deal is rescinded, two facts usually prevail: 1) the consumer is now without a car to drive, and 2) they have been found to be un-bankable. So, if they cannot get financing, and are now without a car, what is the consumer to do?

This dilemma could lead some consumers to feel they were misled when they entered into the transaction, which could lead to a claim for violation of the Consumer Legal Remedies Act. The CLRA can be a dealer’s biggest nightmare – it not only calls for payment of the consumer’s attorneys’ fees, but it also has elements that touch upon class action claims. Thus, a seemingly innocuous claim by a consumer could lead to a consumer rights law firm climbing through your deal-jackets looking for any violation of consumer lending laws.

As with many things in life, an ounce of prevention is worth more than a pound of cure. If you find yourself with an un-bankable consumer and their trade has been sold, consider every option to keep them from coming unglued. This could include financing the transaction yourself, or taking the excess capital you would have had to pay the consumer for the fair market value of their trade, and using that to put them in a deal that works.

While no one likes to lose money on a transaction, the cost of a disgruntled consumer can be staggering if not handled properly. Be smart and try to avoid being on the receiving end of that stick.