In my experience, two of the most common deceptive trade practices in the sale of automobiles involve misrepresentations regarding the mileage of an automobile and failures to disclose prior wreck damage. These commonly are issues in the sale of used automobiles, but the failure to disclose damage to automobiles can occur with new cars as well.
For example, new cars sometimes fall off their transporters when being unloaded and sometimes new cars get into wrecks before they have ever been titled.
These are significant issues as well, because increased mileage and prior wreck damage, particularly when not fully remedied, have major impacts upon the fair market value of vehicles and may also render warranties void.
On an initial review, many attorneys may believe that the only responsible party in an odometer case is the party in the chain of title that rolled back the odometer. Upon further review, however, the law often holds parties up the chain of title to be liable in such cases, sometimes including the retail finance company.
With cases involving prior wreck damage, many defense attorneys representing dealerships will assert that their clients had no actual knowledge of the prior wreck damage and should therefore not be held liable. Dealers, and even retail finance entities, can be held liable in such cases.
B. Who is responsible when an odometer has been rolled back?
Imagine the following hypothetical facts based on one of my cases: Ms. Smith, a consumer, notices an advertisement for a vehicle in the Chronicle which claims a particular vehicle has “Low K,” obviously an indication of low mileage. She calls the advertising dealer and is informed orally that the exact mileage is around 40,000, and she decides to go visit the dealership as a result. At the dealership, she is shown the advertised vehicle which has a sticker affixed to one of the side windows which affirmatively states the mileage to be around 40,000.
After purchasing the vehicle and an extended warranty by way of a retail installment contract that is later assigned to a bank, she begins to notice that the vehicle seems to need constant repairs. Relying on a television story about odometer fraud, she runs a Carfax search and discovers that the odometer of her vehicle may have been rolled back, because the Carfax report notes an emissions test with a recorded mileage that is much more than what has apparently been recorded in the various title transfers visible in the title history of the vehicle.
After sending a demand letter to the dealer, she is contacted by an adjustor for the dealer’s insurance carrier who denied her claim, asserting that the emissions station had merely made a mistake on the inputting of the mileage. Upon contacting the first consumer owner of the vehicle and the dealer which accepted the vehicle as a trade-in, however, she discovered that the vehicle had over 100,000 miles on the odometer at the time of its trade-in after about 2 ½ years of use. The title history did not reflect the true mileage, because the initial entry at the time of trade-in and later sale by the trade-in dealer had been forged, as apparently the first digit of a 6-digit odometer reading entry had been turned into a upper-case “A” and this forgery hid the true mileage in subsequent sales. The issue is who is liable for this obvious fraud.
1. The party directly responsible for the roll-back
The party which rolled back the odometer and forged the mileage reading on the title was apparently a wholesaler which had purchased the vehicle at auction after the trade-in dealer had submitted the vehicle for sale at an auction. This wholesaler was able to forge the odometer reading in the first transfer of title paragraph on the back of the original certificate of title, because the trade-in dealer and the culpable wholesaler were not obligated, as licensed dealers, to apply for a new certificate of title, and thereby record for posterity the information regarding the odometer reading during each transfer, until a retail sale was made.
In short, the wholesaler had the original certificate of title in hand and was able to forge the odometer reading in an effort to hide the roll-back of the odometer performed by the wholesaler. The cheating wholesaler engaged in this course of conduct to make a better profit on the vehicle, having purchased it at the low value reflected by its high mileage and then sold it for a much higher price which was based on a purported mileage reading which was far below the actual experience of the vehicle.
The cheating wholesaler that engaged in the roll-back and the forgery of the title is clearly liable under both the Texas Deceptive Trade Practices Act and the federal Odometer Act. The DTPA explicitly prohibits “disconnecting, turning back, or resetting the odometer of any motor vehicle so as to reduce the number of miles indicated on the odometer gauge. Tex. Bus. & Com. Code § 17.46(b)(16). See, e.g., Houston v. Mike Black Auto Sales, 788 S.W.2d 696, 697-699 (Tex. App. – Corpus Christi 1990, no writ) where a dealer was required to go to trial on this issue based on evidence that the dealer had replaced the odometer and failed to disclose that fact in a later sale. Likewise, the Odometer Act prohibits such tampering. 19 U.S.C. § 32703(2). See, e.g., U.S. v. Whitlow, 979 F.2d 1008 (5th Cir. 1992), an appeal regarding the sentence given to a Houston used car wholesaler who pleaded guilty to odometer tampering and was believed to have rolled back odometers in no less than 1500 automobiles. While both the DTPA and the Odometer Act would permit a private recovery of damages and attorney’s fees against such a party, this may be a waste of time, because the parties engaged in rollbacks are often judgment-proof. That does not mean, however, that consumers injured by such roll-backs are entitled to no relief.
2. The dealer that misrepresented the mileage or failed to disclose the true mileage of the vehicle
In the example set forth above, the dealer made a number of representations about the mileage that turned out to be false.
First, the advertisement stated that the mileage on the vehicle was low when it was over 100,000 miles.
Second, the dealer representative stated orally on the telephone that the mileage was around 40,000 which is clearly false.
Third, the sticker on the car disclosed an exact mileage of around 40,000 when the true mileage was over 100,000.
Obviously, this vehicle was represented to be a low mileage vehicle when, in fact, it had an excessive number of miles which clearly affected the value of the vehicle. As a result, the dealer clearly violated the DTPA, Tex. Bus. & Com. Code § 17.46(b)(5) and (7), by misrepresenting the characteristics and quality of the vehicle. There are numerous Texas cases where dealers have misrepresented the mileage of a vehicle with a rolled-back odometer and have been held liable under the DTPA for the misrepresentation. Green Tree Acceptance, Inc. v. Holmes, 803 S.W.2d 458, 460, 462 (Tex. App. – Fort Worth 1991, writ denied); Houston v. Mike Black Auto Sales, 788 S.W.2d at 699; Jones v. Star Houston, Inc., 1988 Tex. App. LEXIS 827 (Tex. App. – Houston [14th Dist.] 1988, no writ); Gallery Datsun, Inc. v. Metcalf, 630 S.W.2d 853, 854 (Tex. App. – Houston [1st Dist. 1982, no writ); Jack Criswell Lincoln-Mercury, Inc. v. Haith, 590 S.W.2d 616, 617-619 (Tex. Civ. App. – Houston [1st Dist.] 1979, writ ref’d n.r.e).
One defense frequently raised in such cases is that the dealer did not know that the odometer reading that it was disclosing was false, and this fact can be relevant due to the fact that the odometer disclosures on the certificate of title are made based on the seller’s “best knowledge.” In Preston II Chrysler-Dodge v. Donwerth, 744 S.W.2d 142, 144-145 (Tex. App. – Dallas 1987), rev’d on other grounds, 775 S.W.2d 634 (Tex. 1989), the dealer represented that the mileage on the odometer of a vehicle was the accurate mileage “to the best of its knowledge,” and the failure to prove actual knowledge that the mileage on the odometer was inaccurate doomed the DTPA misrepresentation claim.
On the other hand, in Green Tree Acceptance, 803 S.W.2d at 459-460, a similar “to the best of its knowledge” representation was made, but there was enough evidence of actual knowledge that the odometer reading was false to uphold a DTPA verdict. In our example, however, the dealer made an affirmative statement about the mileage unconditioned by any limitation based on its knowledge, which imposes a duty on the seller to know whether its statements were true. First Title Co. of Waco v. Garrett, 860 S.W.2d 74, 76 (Tex. 1993)(“when a seller makes an affirmative representation, the law imposes a duty to know whether that statement is true”); Robinson v. Preston Chrysler-Plymouth, Inc., 633 S.W.2d 500, 502 (Tex. 1982)(“When a seller makes representations to the buyer, he is under a duty to know if his statements are true.”). Thus, the dealer in our example should be held liable for any misrepresentation, whether made with knowledge or not.
Like the DTPA, the Odometer Act also prohibits not only mileage misrepresentations on the prescribed odometer disclosure clauses on certificates of title, but also elsewhere in oral statements, advertising and other written statements. See 49 U.S.C. § 32705(a)(2); Ryan v. Edwards, 592 F.2d 756, 761 (4th Cir. 1979)(false representation of “low mileage” in newspaper advertising actionable, as our oral misstatements of mileage); Hughes v. Box, 814 F.2d 498, 501-502 (8th Cir. 1987). Under the Odometer Act, however, there is no private liability in a civil action unless the defendant is shown to have acted with “intent to defraud.” 49 U.S.C. § 32710(a).
Unlike the duty to establish a failure to disclose under the DTPA with actual knowledge, the “intent to defraud” element in an Odometer Act case can be established by constructive knowledge. In other words, a dealer making a false representation of mileage is liable under the Odometer Act if it reasonably should have known its statement was false or reasonably should have taken investigative steps which would have revealed the falsity of its statement. Nieto v. Pence, 578 F.2d 640, 642 (5th Cir. 1978). In further contrast with the DTPA, the Odometer Act provides that a prevailing consumer is entitled to an automatic award of three times the consumer’s actual damages with minimum damages of $1,500. 49 U.S.C. § 32710(a).
3. The finance company that purchased the retail installment contract
Due to a clause in most retail installment contracts which provides that the holder of the contract is subject to all claims and defenses that the buyer has against the seller, assignee finance companies have vicarious liability for the odometer violations of dealers. See Riggs v. Anthony Auto Sales, Inc., 32 F.Supp.2d 411, 415-417 (W.D. La. 1998). This vicarious liability is limited by the terms of the “holder clause,” such that a consumer would be entitled to cancel the debt and recover affirmatively a sum not to exceed what has been paid under the contract.
Finance companies deal with the potential liability flowing from the “holder” clause by requiring dealers to agree to indemnify them should they be sued over a wrongful act performed by the dealer. This indemnification is usually a prominent part of the formal dealer agreement between the dealer and the finance company, which sets forth the terms of the relationship between them and the terms under which the finance company will purchase retail installment contracts. In lawsuits in which the lender has been added under a “holder clause” theory of vicarious liability, the finance companies often file cross-claims against the dealer seeking indemnification. In other cases, the dealer may agree to purchase the retail installment contract and assume all liability in an effort to save the finance company the expense and inconvenience of litigation.
Based on this inherent indemnification arrangement, the dealer is usually, but not always, the party which is ultimately responsible for covering the monetary cost of defensive attorney’s fees, settlement, and judgment. The most common exception to this general rule is when the dealer is out of business or otherwise insolvent.
C. Who is responsible when prior wreck damage has not been disclosed?
Imagine the following hypothetical facts based on one of my cases: Mr. and Mrs. Smith appear at a dealership and take their time looking over the available vehicles. Finding one late model vehicle with relatively low mileage, Mrs. Smith asked if there was anything wrong with the vehicle and whether it had been in a wreck, particularly in light of its low milage, and was told that there was nothing wrong with the vehicle and that it had only one owner before being traded-in to that dealer. As a result of these assurances, the Smiths purchased the vehicle. A few months after the purchase concluded, Mrs. Smith was informed by the service department that the vehicle had been in a serious wreck previously and that she might want to return it. After contacting the first and only owner, it was discovered that the first owner had been in a serious wreck, that the repairs had been performed by the same dealer which had later sold the car to the Smiths, and that he informed the salesman at the time of trade-in that the vehicle had been in a wreck previously, which fact reduced the trade-in allowance provided by this same dealer.
There is some specific Texas law which is intended to provide some protection against this sort of deception in automobile sales, but, in many cases, it does not appear to work. Under Tex. Transp. Code § 501.0911 through 501.0931, the Texas Legislature has set up a regulatory framework which requires vehicles which have suffered damages equal to 75% or more of their fair market value prior to an accident to have branded titles and those which have suffered damages equal to 95% or more of their prior fair market value to be used only as salvage. To avoid the loss in value associated with a branded title, however, insurance companies need merely estimate that the cost of repair following a serious wreck to be less than 75% of the prior fair market value. By manipulating either the estimate of repairs or the appraisal of the prior value, insurance companies can avoid the intended sweep of this statutory scheme. Despite the fact that the salvage title laws can be easily avoided, consumers can still receive some measure of protection through the DTPA.
1. Dealer liability
Under the foregoing facts, the dealer might well be liable both for an affirmative misrepresentation, in violation of DTPA § 17.46(b)(5) and (7), and a failure to disclose a material fact, in violation of DTPA § 17.46(b)(24). Many dealers have been liable for 7 affirmatively misrepresenting the collision history of vehicles. River Oaks L-M, Inc. v. Whalen, 1998 Tex. App. LEXIS 5687 (Tex. App. [1st Dist.] 1998, no writ); Grabinski v. Blue Springs Ford Sales, Inc., 136 F.3d 565 (8th Cir. 1998); Torrance v. AS & L Motors, Ltd., 459 S.E.2d 67 (N.C. App. 1995). Likewise, many dealers have also been held liable for failing disclose the prior wreck history of vehicles. Tandy v. Marti, 213 F.Supp.2d 935 (S.D. Ill. 2002); Bird v. John Chezik Homerun, Inc., 152 F.3d 1014 (8th Cir. 1998); Parrott v. Carr Chevrolet, Inc., 965 P.2d 440 (Ore. 1998), aff’d in part, rev’d in part, 17 P.3d 473 (Ore. 2001). As mentioned previously, a failure to disclose violation requires proof of the dealer’s knowledge of the prior wreck history as well as proof that this fact was not disclosed. Based on these violations, dealers in Texas would be liable for damages or rescission/revocation of acceptance/restoration of money or property under DTPA § 17.50(b)(3).
2. Finance company liability
As stated before, finance companies that purchase retail installment contracts are typically held liable for the wrongs of the dealers based on the “holder” clause. Even in those cases in which the “holder” clause is missing but should have been placed in the contract, recent amendments to the UCC have implied the existence of such a clause when it should have been present. See Tex. Bus. & Com. Code § 9.403.
Despite the weakening of the DTPA and the obvious impact of tort reform on Harris County juries, there remain many deceptive automobile sales cases worth taking to court. In particular, odometer rollbacks and undisclosed wreck damage provide strong bases for suit. Prior to suit, however, plaintiff’s counsel must evaluate the facts and consider all of the risks associated with trial before taking on such cases. Given the conservative litigation climate, plaintiffs’ counsel are advised to take those cases that even a conservative juror would consider to be fraud. In the automobile context, odometer rollbacks and failures to disclose wreck damage are the types of cases that all jurors would view as fraudulent and worthy of their time in the jury box.