The case involved an earlier lawsuit filed against Hester that sought payment of a consumer debt. She had entered into a retail installment contract with Aqua Finance to fund the installation of siding on her home. When Hester did not pay the debt, Graham, Bright & Smith and R. Spencer filed suit against her in Dallas County, Texas, despite the fact that Hester resides in Smith County, Texas.

Federal Magistrate Judge Judith Guthrie ruled that defendants Graham, Bright & Smith and R. Spencer Shytles violated the Fair Debt Collection Practices Act by filing suit against Hester in an inappropriate venue. The suit was not filed in the county where the contract was signed or where Hester resided, as required by the Act. Judge Guthrie also ruled that Aqua Finance violated the Texas Deceptive Trade Practices Act on the same grounds. A trial on damages and other relief is currently scheduled for May 23, 2005.

“We are pleased with the judge’s ruling, but unfortunately we do not believe this is an isolated case,” said Tomlinson, who is Board Certified in Commercial and Consumer Law. “Without an expert in consumer law fighting for them, Texas consumers can be easily intimidated when subjected to this type of insidious distant-forum abuse debt collection practices.”

The Federal Fair Debt Collection Practices Act includes an array of consumer protections, such as barring debt collector from harassing the consumer, used profane language, calling repeatedly, calling after 9:00 p.m. or before 8:00 a.m., threatened to sue, calling at work against the consumer’s wishes, misrepresenting the amount owed or the status of the debt, and falsely stating that the consumer has committed a crime or similar wrongdoing. Under the Act, a debt collector must cease all communications after the consumer informs them in writing that they refuse to pay or want the debt collector to stop calling.

###

About the Law Office of Richard Tomlinson

Based in Houston, the Law Office of Richard Tomlinson is a consumer law firm focused entirely on consumer law and dedicated to providing legal counsel to consumers in order to give them a fighting chance. The firm represents clients in such cases as Texas Lemon laws and other consumer problems with new or used car deals, breach of warranty and other residential construction disputes, Fair debt collection law and predatory lending, and Deceptive trade practices. For more information go towww.houstonconsumerlaw.com or call 713-627-2100 ext. 219.

For additional information on this release, please contact:
Richard Tomlinson
Phone: 713-627-2100 ext. 219
Email: rtomlinson@houstonconsumerlaw.com
Source: Law Office of Richard Tomlinson
Website: http://www.houstonconsumerlaw.com

]]> http://houstonconsumerlaw.com/law-office-of-richard-tomlinson-successfully-defends-consumer-against-violation-of-federal-and-state-consumer-protection-laws/feed/ 0 http://houstonconsumerlaw.com/law-office-of-richard-tomlinson-files-class-action-lawsuit-against-finance-company-alleging-violations-of-consumer-protection-laws/ http://houstonconsumerlaw.com/law-office-of-richard-tomlinson-files-class-action-lawsuit-against-finance-company-alleging-violations-of-consumer-protection-laws/#comments Fri, 23 Apr 2010 15:14:42 +0000 administrator http://houstonconsumerlaw.schipulwp.com/?p=104 As many as 2,500 threatening letters that “crossed the line” were sent to Texans

Houston, March 21, 2006 – Houston consumer protection attorney Richard Tomlinson has filed suit against Drive Financial Services, L.P. alleging numerous violations of federal and state consumer protection laws while attempting to collect debts.

According the lawsuit, filed on behalf of Houston resident Velincia Plummer and others (Case 4:06-cv-00068), Drive made it a practice to send people who fell behind in their payments a letter that violated the Federal Fair Debt Collection Practices Act and the Texas Debt Collection Act. Among other alleged violations, the letter threatens wage garnishment and pretends to be from an attorney or law firm, when in fact it was sent by Drive. Both are violations of consumer protection laws.

“Federal and state consumer protection laws make it clear that lenders can’t use overly aggressive and threatening tactics in an effort to collect a debt,” said Tomlinson. “This lawsuit should alert consumers that they can fight back when they receive a threatening demand by having it reviewed by an attorney. It may be a violation of federal or state law.”

Tomlinson believes that Drive, which boasts on its Web site that is has more than 10,000 dealer partnerships across North America, sent such letters to at least 800 – and perhaps as many as 2,500 – Texas residents.

The Federal Fair Debt Collection Practices Act includes an array of consumer protections, such as barring debt collector from threatening to sue, harassing the consumer, using profane language, calling repeatedly, calling after 9:00 p.m. or before 8:00 a.m., calling at work against the consumer’s wishes, misrepresenting the amount owed or the status of the debt, and falsely stating that the consumer has committed a crime or similar wrongdoing. Under the Act, a debt collector must cease all communications after the consumer informs them in writing that they refuse to pay or want the debt collector to stop calling.

For additional information on this release, please contact:
Dan Keeney
Phone: (832) 467-2904
Email: dan@keeneypr.com
Source: Richard Tomlinson
Website: http://www.houstonconsumerlaw.com

]]> http://houstonconsumerlaw.com/law-office-of-richard-tomlinson-files-class-action-lawsuit-against-finance-company-alleging-violations-of-consumer-protection-laws/feed/ 0 http://houstonconsumerlaw.com/ask-amy-collectors-want-money-for-debt-not-owed/ http://houstonconsumerlaw.com/ask-amy-collectors-want-money-for-debt-not-owed/#comments Fri, 23 Apr 2010 15:14:01 +0000 administrator http://houstonconsumerlaw.schipulwp.com/?p=102 http://www.click2houston.com/investigates/10316957/detail.html

“HOUSTON — Demanding letters and frequent phone calls — you know the feeling if you’ve ever owed a debt. But one man says he doesn’t owe a dime, and he’s asking Amy what to do about a letter asking him to pay up. KPRC Local 2 investigative reporter Amy Davis has the answer.”

See link to Houston Chronicle article below-

http://www.chron.com/disp/story.mpl/business/4692175.html

For additional information on this release, please contact:

Clarissa Perez

Phone: (713) 627-2100

Email: cperez@houstonconsumerlaw.com

]]> http://houstonconsumerlaw.com/interview-with-richard-tomlinson-in-houston-chronicle-on-payday-loan-regulation/feed/ 0 http://houstonconsumerlaw.com/harassment-of-debtors-when-to-sue/ http://houstonconsumerlaw.com/harassment-of-debtors-when-to-sue/#comments Fri, 23 Apr 2010 15:12:31 +0000 administrator http://houstonconsumerlaw.schipulwp.com/?p=98 HARASSMENT OF DEBTORS: WHEN TO SUE

(presentation to Poverty Law Section of the State Bar of Texas on 2/1/08)

Richard Tomlinson

Law Office of Richard Tomlinson

3100 Timmons Lane, Suite 100

Houston, Texas 77027

Phone: 713-627-2100

Fax: 713-627-2101

E-mail: rtomlinson@HoustonConsumerLaw.com

A. Introduction

In practicing consumer law over the past 28+ years, I have come to the conclusion that case selection is probably one of the most important features of any successful law practice. That conclusion also holds true for those who practice in legal services, as I once did in East Texas and Houston. As a legal services practitioner, you should want to utilize the limited resources available, your time, on those cases with the best chance of leading to a successful outcome. Here are a few general rules that I follow.

1. Avoid trying to make new law.

Don’t forget that you practice in Texas. Given the current conservative climate prevalent in Texas courts, state and federal, I am very conservative professionally in my reading of the law.¹ I select cases largely on the basis of whether the law applicable to the facts of a particular case is accepted and not subject to challenge. I am not expecting any judges in this state to make any leaps and to extend the law to areas not previously recognized. To the extent the law grows to reflect changes in the current environment, I expect those changes to occur largely in other jurisdictions.

2. Look for objective facts that support your claims.

Reflecting my desire for the selection of successful cases, I prefer cases where the

factual positions of my clients are difficult to attack. In the context of fair debt collection, that means I prefer a case with a high level of objective proof. For example, I prefer tapes of telephone calls when abusive tactics are used; I prefer the testimony of third parties that are unrelated to the client in wrongful third-party cases; and I am always happy to work on a case based on a dunning letter. In all three cases, what actually happened is not seriously at issue. Similarly, I prefer cases where there is no obvious defense, like the bona fide error defense recognized by both the Fair Debt Collection Practices Act (FDCPA) and the Texas Debt Collection Act (TDCA). That means I prefer claims where it appears the conduct at issue seems to be widespread as reflected by complaints with the Better Business Bureau or the applicable Attorney General’s office, because then the debt collector will have difficulty asserting that there are procedures in place which are reasonably adapted to prevent such conduct. See 15 U.S.C. § 1692k(c); Tex. Fin. Code § 392.401.

3. Think carefully about the court in which you appear.

In evaluating the odds of a claim, one of my main inquiries relates to the court in which a suit is filed. Here in Houston, I often prefer to file new lawsuits under the FDCPA in federal court, because I actually think there is a better chance of getting a reasonable, open-minded judge. That rule of thumb, however, can be wrong (even in Houston). It depends on the judges in your jurisdiction and how well you can predict their behavior on the bench. In considering the merits of a counterclaim in a debt action filed in your local county court at law, you have to weigh the predilections of the sitting judge. If you have no prior experience, you need to ask around. In deciding where to file an affirmative FDCPA claim, you need to consider whether your chances are better in state court or federal court. To restate the obvious, the Rio Grande Valley is not the same as Amarillo or Houston.

Moreover, the availability of federal jurisdiction only exists when there is a federal claim. In short, you cannot file an unfair debt collection suit in federal court unless the FDCPA applies. Unlike the TDCA which covers all parties engaging in the collection of consumer debts, the FDCPA does not apply to original creditors seeking to collect their own debts unless they use a name other than their usual business name to collect. Nevertheless, the scope of the FDCPA is still broad enough to cover independent debt collection agencies, buyers of delinquent consumer accounts and law firms that regularly engage in the collection of consumer debt.

4. Recognize the statutory relief available in your case.

In deciding what action to take, you need to recognize that the TDCA has a wider scope than the FDCPA but it prohibits less misconduct than the FDCPA. Similarly, while both statutes permit the recovery of actual damages, only the TDCA offers injunctive relief and only the FDCPA offers awards of statutory damages when there is no proof of actual damages.

5. Does the debt collector’s behavior fail the smell test?

Most importantly, you must consider whether the debt collector’s conduct would appear to be deceptive or unfair to a typical juror. Run the facts by colleagues, friends and family to get some idea how others respond to the facts. The best cases are those in which persons of all stripes and backgrounds are offended by the conduct at issue.

B. Common unfair debt collection claims

In my practice, I see a number of common FDCPA and TDCA claims that are easy to prove factually and involve the application of well-accepted law. What follows is a non-exclusive list of such claims.

1. Threats of arrest and prosecution related to payday loan debt

Like many of your clients, many of mine are sometimes so desperate for cash that they will seek out payday loans, a form of lending with 500+% interest rates which is also associated with quite aggressive debt collection practices. The high rates of interest in these loans do reflect objectively the high risk of potential default, given the absence of any serious underwriting of these loans and the obvious financial desperation of those willing to seek these loans. Nevertheless, payday loan companies are generally quite profitable. How can that be explained? My explanation, based on years of anecdotal experience (and admittedly no empirical study), is that payday loan borrowers make payments on these loans repeatedly (on average, 8-10 times according to a number of studies), because they fear arrest and prosecution if they fail to make the payments.

Payday loan borrowers fear arrest and prosecution, because payday lenders and their third-party debt collectors implicitly or explicitly indicate that the bouncing of a debit or check given as security for the loan constitutes a hot check misdemeanor or a theft by check felony. NOT TRUE. Giving a bad check as compensation during a sale or loan transaction is only a criminal offense if the party accepting the check (here the payday lender) had reason to believe that the check was actually good on the day it was given. In the typical payday loan transaction, the consumer gives a check to the lender on the day she signs the note and receives the proceeds of the loan, but the lender agrees not to deposit that check or debit the account until the due date of the loan, typically 2 weeks later, and then only if the consumer fails to pay off the loan or to renew it by paying the amount of interest earned over the short term of the loan. In effect, the check given by payday borrowers is like a post-dated check, because the payday lenders agree not to cash the check or debit the underlying account until 2 weeks in the future. As a result, payday lenders know that the check is not any good on the day it is given, as no one in their right mind would seek one of these high-interest loans if she had the money she needed in her own bank account. Under these circumstances, the subsequent bouncing of the check is not a crime in the eyes of most prosecutors, because there is no presumption of criminal intent. Jones v. Kunin, 2000 U.S. Dist. LEXIS 6380, *3-4 (S.D. Ill. 2000); Turner v. E-Z Check Cashing, 35 F.Supp.2d 1042, 1051-1052 (M.D. Tenn. 1999); Hartke v. Ill. Payday Loans, Inc., 1999 U.S. Dist. LEXIS 14937, *9 (C.D. Ill. 1999).

Let me add that, in my experience, payday lenders have not commonly sought to prosecute borrowers who default and whose checks or debits then bounce. There may be exceptions to this general rule, as I recall last year hearing from a payday loan borrower in a town south of Dallas who was prosecuted in J.P. court for this purported criminal conduct.

If a third-party debt collector makes a threat of criminal arrest or prosecution arising from failure to pay a payday loan, you probably have an FDCPA claim under 15 U.S.C. § 1692e(4), (5) and (7). See Nance v. Ulferts, 282 F.Supp.2d 912 (N.D. Ind. 2003). It likewise constitutes a TDCA claim under Tex. Fin. Code § 392.301(a)(2). See Brown v. Oak Lawn Bank, 718 S.W.2d 678, 680 (Tex. 1986), The claim arises for two reasons: (1) the accusation that the borrower committed a crime is false, and (2) the threat of actual prosecution is probably false as well. Given that both statutes are violated, you could seek actual damages under both, statutory damages under the FDCPA and injunctive relief under the TDCA.

The best of these claims include evidence of taped telephone calls or written communications in which the debt collector made the wrongful threat. In one of my pending cases, Joebert Silva v. Capital Collections LLC (Civil Action No. A 07 CA 283 LY; In the United States District Court for the Western District of Texas, Austin Division), the debt collector not only made two written threats of criminal prosecution, it also threatened to file these charges in a court that does not even exist, the Magistrates Court of Williamson County, Texas.

2. Filing suit in the wrong venue

Under 15 U.S.C. § 1692i, a suit to collect a consumer debt in any venue other than the jurisdiction in which the consumer debtor resides at the time suit is filed or the jurisdiction in which the underlying contract was signed by the consumer debtor violates the FDCPA. Addison v. Braud, 105 F.3d 223 (5^th Cir. 1997); Fox v. Citicorp Credit Services, Inc., 15 F.3d 1507 (9^th Cir. 1994); McKnight v. Benitez, 176 F.Supp.2d 1301 (M.D. Fla. 2001). The Texas Deceptive Trade Practices Act also prohibits this distant forum abuse but only a county level. See Tex. Bus. & Com. Code § 17.46(b)(23). Here, the law is not only clear, but the facts are usually indisputable.

This type of collection abuse happens all of the time in Texas. A debt buyer may sue a consumer in the wrong county or even the wrong J.P. court precinct and thereby violate section 1692i. When it happens in these cases, I sometimes move to transfer venue to the correct venue and then claim the attorney fee paid to transfer venue as a form of actual damages, together with statutory damages of $1,000, as an FDCPA counterclaim. Many times this leads the law firms to offer a mutual dismissal, a great outcome for our clients. In other cases, I have encountered law firms that have intentionally filed suit in the wrong venue with the intent of likely obtaining a default judgment — what I call a “default trap.” In some of those cases, I have actually sued the law firm for filing suit in the distant forum. See Hester v. Graham, Bright & Smith, 2004 U.S. Dist. LEXIS 28923 (E.D. Tex. 2004). Similarly, in an investigation I handled when I was serving as an assistant attorney general in the Texas Attorney General’s office, we received complaints that an appliance store chain was suing defaulted debtors exclusively in Jefferson County, even though they resided and signed the contracts in San Antonio, Austin and Houston. Since this violated the DTPA, the AG was authorized to seek an injunction under Tex. Bus. & Com. Code § 17.47 but ultimately accepted an assurance of voluntary compliance under Tex. Bus. & Com. Code § 17.61.

3. Threat of wage garnishment or seizure of homestead

Another common form of unfair debt collection claim involves threats of wage garnishment or seizure of homestead made either in a written dunning letter or over the telephone (and preferably taped). As you know, Texas law permits wage garnishment only for the collection of child support and alimony, while federal law tends to limit its use of this collection tool to student loan and income tax debts. Likewise, only purchase money, home equity, home improvement and property tax loans are allowed to impose liens on homesteads in Texas, and judgment liens arising from abstracts of judgment based on other debts, such as credit card debt, do not even impose a lien on a homestead. A threat of suit coupled with a threat of wage garnishment or seizure of one’s home is not uncommonly used by debt collectors and debt buyers seeking to collect credit card and other debts, even though this tool is unavailable. As a result, the use of these wage garnishment and home seizure threats during an effort at collecting a consumer debt in Texas violates 15 U.S.C. § 1692e(4) and (5) and Tex. Fin. Code §§ 392.301(a)(8) and 392.304(a)(19).

I recently asserted a wage garnishment claim in a class action against Drive Financial, an original creditor that used a name other than Drive in a dunning letter to Texas consumers that also falsely threatened to seek garnishment of wages, and this claim settled on excellent terms for the class —- the payment of $250,000 in statutory damages to a little less than 1200 consumers. In an individual case, this type of claim can be used to seek the maximum statutory damages award of $1,000 under 15 U.S.C. § 1692k(a)(2)(A).

4. Threats and filing of suit on time-barred debt

Under Texas law, most debts, including credit card and automotive deficiency debt, have 4-year statutes of limitation. Threatening to file suit on a credit card debt when the statute of limitations has run is a violation of 15 U.S.C. § 1692e(5), while actually filing suit on such a stale claim violates both §§ 1692e(5) and 1692f. The ultimate source for this proposition of law is Kimber v. Federal Financial Corporation, 668 F.Supp. 1480 (M.D. Ala. 1987). For more recent examples of this theory, see Harvey v. Great Seneca Financial Corporation, 453 F.3d 324, 332 (6^th Cir. 2006); Freyermuth v. Credit Bureau Services, Inc., 248 F.3d 767,771 (8^th Cir. 2001); Goins v. JBC & Associates, 352 F.Supp.2d 262 (D. Conn. 2005). Most recently, I have raised this theory in response to petitions to confirm arbitration awards sought by MBNA on credit card debt, because the debt buyer or the law firm failed to file the confirmation petition within the 1-year period permitted by the Federal Arbitration Act that traditionally applies to credit card debt claims.

5. Failing to validate a debt before collecting

Most debt collectors send dunning letters with a particular notice required by 15 U.S.C. § 1692g that informs the recipients that the debt will be verified if all or part of the debt is disputed. When these letters are sent, you may want to advise your clients to dispute the debt in writing (by fax or certified mail to prove receipt), particularly when you think the letter is addressed to the wrong person, the debt has been paid off or the limitations period has run. Under this same section, the debt collector is required to refrain from all collection efforts until such time as written verification is provided. While not much is required in terms of verification, many debt collectors violate the FDCPA by continuing to collect after receiving notice of a dispute. 15 U.S.C. § 1692g(b). This allows you to raise a claim for $1,000 in statutory damages.

6. Contacting consumer after being told not to call at work

Section 1692c(a)(1) and (3) also prohibits calling a consumer at work if the debt collector has been told that it is not convenient to make calls at the workplace or that the employer prohibits such calls. While these claims are not always subject to being taped, testimony from a non-plaintiff employer or supervisor is hard to attack. Again, this permits you to seek $1,000 in statutory damages.

7. Contacting a consumer directly when known to be represented by counsel

Section 1692c(a)(2) prohibits debt collectors from contacting a consumer debtor directly when the debt collector is aware the debtor is represented by counsel unless the attorney for the debtor fails to respond within a reasonable time to a communication from a debt collector. I find that many debt collectors violate this provision, permitting a claim for $1,000 in statutory damages.

8. Inappropriately contacting a third party

Debt collectors are allowed to contact third parties to obtain location information, but they cannot disclose that debt is involved or even the name of their employer unless asked. 15 U.S.C. § 1692b(1) and (2). Calling friends and family of a debtor and discussing without solicitation the debt at issue is a clear violation of this provision.

9. Leaving message for debtor without disclosing that the call is from a debt collector

Section 1692e(11) requires debt collectors to identify themselves as debt collectors whenever they call a debtor. If they leave a message on the debtor’s telephone without this disclosure, this provision is violated.Foti v. NCO Financial Systems, Inc., 424 F.Supp.2d 643 (S.D.N.Y. 2006). The problem for debt collectors is that if they call a home where family members other than the debtor’s spouse or children live, leaving this message could violate the law against third party contact. Despite the heavy risk, debt collectors continue to leave these messages.

10. Collecting debts against the wrong person

Given the prevalence of identity theft and a number of prevalent last names, debt collectors often pursue the wrong parties. If your client receives a letter with a Section 1692g notice and she has no idea what this letter is about, you should urge your client to dispute the debt and to state specifically that it is not her debt. If your client knows the claim arises out of identity theft, that should be stated in the dispute letter as well. If the debt collector continues to pursue an individual after being informed that it is dunning the wrong person, you can allege that the debt collector has violated 15 U.S.C. § 1692e(2)(A), because it has misrepresented the character and legal status of the debt. By sending a dispute letter and awaiting further collection effort before raising the claim, you also avoid much of the risk of a successful bona fide error defense.

C. Conclusion

My first six years of practice (1979-1985) was spent working in two legal services programs in Beaumont, Jasper, Nacogdoches, Tyler and Houston. I remember practicing in small towns across East Texas and discovering consumer law to be my professional passion. During those early years of my career, I benefitted from the opportunity of frequent trial experience as well as mentoring by more experienced counsel, such as Brenda Willett. I know that I would have liked more contact with private attorneys in the field that I was adopting as my specialty, so that I could have learned even more about the in’s and out’s of consumer law. Given that understanding, I am happy to respond to inquiries about consumer law matters, including fair debt collection issues. Feel free to call or e-mail me if I could help.

For additional information on this release, please contact:

Clarissa Perez

Phone: (713) 627-2100

Email: cperez@houstonconsumerlaw.com

]]> http://houstonconsumerlaw.com/harassment-of-debtors-when-to-sue/feed/ 0 http://houstonconsumerlaw.com/payday-loans/ http://houstonconsumerlaw.com/payday-loans/#comments Fri, 23 Apr 2010 15:11:09 +0000 administrator http://houstonconsumerlaw.schipulwp.com/?p=96 http://www.texasbar.com/Template.cfm?Section=Current_Issue&Template=/ContentManagement/ContentDisplay.cfm&ContentID=20472

For additional information on this release, please contact:
Clarissa Perez
Phone: (713) 627-2100
Email: cperez@houstonconsumerlaw.com
Source: www.texasbar.com/tbj
Website: N/A

]]> http://houstonconsumerlaw.com/payday-loans/feed/ 0 http://houstonconsumerlaw.com/zombie-debts-refuse-to-die/ http://houstonconsumerlaw.com/zombie-debts-refuse-to-die/#comments Fri, 23 Apr 2010 15:10:28 +0000 administrator http://houstonconsumerlaw.schipulwp.com/?p=94 Zombie Debts Refuse To Die

Click the link above to read the full Article on www.chron.com.

Wary of Client E-Mail Scams

by Richard Tomlinson

Attorney at Law

Board-Certified in Consumer and Commercial Law

1 Greenway Plaza, Suite 100

Houston, Texas 77046

713/627-7747 (telephone)

713/727-3035 (fax)

rtomlin4@ix.netcom.com (e-mail)

With thanks to:

Donald L. Turbyfill

Devlin, Naylor & Turbyfill

4801 Woodway, Suite 420 West

Houston, Texas 77056

713/622-8338 (telephone)

713/713/586-7053 (fax)

dturbyfill@dntlaw.com (e-mail)

(Presented to State Bar of Texas Consumer Law Section Seminar in 2004)

In the typical automobile sales transaction, there are a number of parties that serve particular roles.   First, whether the transaction involves a new or used vehicle, there is a floorplanner which provides financing for the dealer to put the automobile on the lot for sale, secured by a purchase money security interest (PMSI) in the dealer’s inventory.  Second, there is the dealer that is offering to sell the vehicle.   Third, there is the consumer who agrees to purchase the vehicle off the lot of the dealer.   Finally, there is the retail finance source which ultimately provides the funding for the purchase of the automobile from the dealer by the consumer, secured by a PMSI in the vehicle which is the subject of the sale.   This retail financing usually comes in one of two forms.   A retail lender can provide direct financing to consumers who seek their own funding or indirect financing by purchasing a retail installment contract executed by the dealer and the consumer.

What happens when a vehicle is sold by a dealer without payment of the inventory lender’s PMSI?   This is commonly known as a “sale out of trust.”    Such sales out of trust are very common, especially with failing used car dealers who must steal from Peter to pay Paul.   The law must determine who must suffer or share the risk of loss when such a sale out of trust occurs.   Attorneys representing consumers can make at least modestly decent money in such cases, as long as careful case selection analysis is conducted before offering to be retained.   On the one hand, consumers in these cases are sympathetic even to very conservative judges and jurors, because they are often truly innocent and yet have suffered a loss of title or even possession of a vehicle that they had purchased.   On the other hand, there can be substantial risk in these cases as well, however, because there may be no deep pocket defendant that can afford to pay damages or afford other relief.  Before agreeing to represent a consumer in a sale out of trust case, consumer attorneys must be sure that their prospective consumer is innocent and that there is a target defendant with the resources to pay damages.   With the right facts, the right client and the right defendant, an attorney representing an innocent consumer can do well for his client and himself.   This paper endeavors to survey how the law has addressed the burden of risk in sales out of trust and, thereby, to give consumer advocates the tools to identify those cases which are worth handling.

A.        Background of sales out of trust

Many dealers need financing to purchase their inventory of automobiles, whether they are offering new cars or used cars for sale.   When dealers need such financing, they usually sign floorplan agreements with their lenders.   In the case of new car dealers, they

frequently get this financing from the finance subsidiaries of the manufacturers, such as GMAC or Ford Motor Credit.   With used car dealers, such financing may come from a local bank or an individual or group of individuals.   Under these floorplan agreements, dealers receive funds from the lender to purchase new cars from a manufacturer or used cars from a wholesale source, such as an auction or another dealer.   In return for providing a line of credit to purchase inventory, for example at an auction, the dealer will agree to grant a security interest to the lender on all of its inventory.   In practice, this means that, when a floorplanned vehicle is sold off its lot, the dealer is obligated to use the proceeds first to pay off the principal and interest owed to its floorplanner, leaving any remainder as its gross profit.   To further protect themselves, floorplanners will commonly retain possession of the titles or manufacturer’s certificates of origin to automobiles purchased with their credit until the money that they have advanced, together with interest or other applicable fees, is paid off by the dealer.

Not infrequently, dealers, especially in the used car context, sell floorplanned vehicles to consumers by execution of a retail installment contract, receive a payment from a finance company for the sale and assignment of the contract, and then fail to use these proceeds to pay their floorplanner.   (The reasons for this failure to pay can run the gamut from excessive spending on drug or gambling addictions, payment of other demanding creditors before the floorplanner to simple business incompetence.)  What is a floorplanner to do?   At a minimum, the injured floorplanner will usually refuse to release the title it has retained as security.   More assertive floorplanners have even arranged for the repossession of the floorplanned vehicle from the innocent consumer-buyer.   Even when a consumer does not find the automobile repossessed in the middle of the night by the floorplanner, the dealer’s failure to obtain title and registration for the consumer will prevent the consumer from lawfully operating the vehicle.   In effect, floorplanners usually try to assert that the consumer-buyer and the finance entity that financed the sale should bear the entire risk of loss from the dealer’s failure to pay.

To obtain a license to sell vehicles, used car dealers are required to have a $25,000 bond in place to cover damages incurred by buyers and others when title does not pass.  See Tex. Transp. Code § 503.033.    As currently construed, this law permits consumers, retail finance entities and wholesalers to sue what are often defunct dealers and obtain judgments and then to recover the amount of these judgments against the applicable dealer bond of $25,000.   Old Republic Surety Company v. Reyes, 2002 Tex. App. LEXIS 5649 (Tex. App. – Dallas 2002, pet. pending)(consumer); Grammercy Ins. Co. v. Arcadia Financial Ltd., 96 S.W.3d 320, 323-326 (Tex. App. – Austin 2001, pet. denied)(retail finance company); Grammercy Ins.  Co. v. Auction Finance Program, 52 S.W.3d 360, 363-368 (Tex. App. – Dallas 2001, pet. denied)(auction house); Grammercy Ins.  Co. v. Arcadia Financial Ltd., 32 S.W.3d 402, 407 (Tex. App. – Houston [14^th Dist.] 2000, no pet.)(retail finance company); Lawyers Surety Co. Royal Chevrolet, 847 S.W.2d 624, 626-627 (Tex. App- Texarkana 1993, no writ)(wholesaler); Geters v. Eagle Ins. Co., 834 S.W.2d 49, 50 (Tex. 1992)(consumer).   Interestingly enough, floorplanners would usually have no claim to recovery under the bond.   Grammercy Ins. Co. v. MRD Investments, Inc., 47 S.W.3d 721, 727 (Tex. App. – Houston [14^th Dist.] 2001, pet. denied); Lawyers Surety Corporation v. Riverbend Bank, 966 S.W.2d 182, 185-187 (Tex. App. – Fort Worth 1998, no pet.).

Problems frequently arise, however, because a $25,000 bond will usually only cover the loss associated with one or two automobiles.   Additionally, the bond covers only claims occurring during the 12-month term of the bond which has been reduced to judgment.   Sureties most often pay claims in order of presentment.   Thus, the surety bond is paid out on a first-come-first serve basis with the first claimant recovering up to the amount of the $25,000 face value of the bond and with each claim reducing the value of the bond until fully depleted.   When a dealer sells out of trust, however, it is not unusual for the dealer to sell a whole raft of vehicles out of trust before it is discovered.    When the minimal dealer bond is not enough to cover the potential loss, the question of who bears the risk of loss must be addressed head-on.   Unfortunately, in these circumstances, the law in Texas is as not clear on the placement of the risk of loss as I wish it was.

B.        Who should bear the risk of loss?

As support for the position that the consumer and the retail finance entity should bear the full risk of loss, the floorplanner will usually argue that the purported sale of the vehicle to the consumer-buyer by the dealer was void due to the failure of the dealer to possess title or to transfer title at the time of sale.   Floorplanners rely specifically on Tex. Transp. Code § 501.071(a) which provides that “[a] motor vehicle may not be the subject of a subsequent sale unless the owner designated on the certificate of title transfers the certificate of title at the time of sale” and Tex. Transp. Code § 501.152 which provides that it is an offense to sell or offer to sell a motor vehicle registered in this state when the seller “does not possess the title receipt or certificate of title for the vehicle.”   Thus, since Tex. Transp. Code § 501.073 provides that “[a] sale made in violation of this chapter is void and title may not pass . . . ,” floorplanners argue that no title passes when they are holding the title and the dealer did not transfer title at the time of the purported sale.   In a number of cases in which floorplanners, wholesalers and other sellers were paid with drafts that bounced, several Texas appellate courts have accepted this Certificate of Title Act (“COTA”) argument and have found subsequent sales by dealers to be void.   Bank One Texas N.A. v. Arcadia Financial Ltd., 219 F.3d 494, 497-498 (5^th Cir. 2000); Allstate Insurance Company v. Troy’s Foreign Auto Parts, 2001 Tex. App. LEXIS 5029 (Tex. App. – Dallas 2001); Gallas v. Car Biz. Inc., 914 S.W.2d 592, 594-595 (Tex. App. – Dallas 1995, pet. denied); Everett v. United States Fire Insurance Company, 653 S.W.2d 948, 950 (Tex. App. – Fort Worth, no writ); Boswell v. Connell, 556 S.W.2d 624, 625-626 (Tex. Civ. App. – Beaumont 1977, writ ref’d n.r.e.).   What does this mean in practice?   The floorplanner retains title, is entitled to possession of the vehicle sold out of trust, and the innocent consumer must bear the entire risk of loss.   The practical result places every consumer in peril.   Giving legal significance to the mere possession of a certificate of title provides the floorplanning lender the best of both worlds: permitting its inventory collateral to be exposed to sale to the public from which proceeds are generated for the dealer to pay the secured debt, and empowering that lender to render void, retroactively, any sale of which it does not approve.

1.         Agency Exception

In an effort to ameliorate the harshness of this rule, other courts have found an agency exception.   Initially, these courts cite to the recognized rule that a sale of an automobile may still be valid as between a buyer and a seller despite non-compliance with COTA.   Phil Phillips Ford, Inc. v. St. Paul Fire & Marine Insurance Co., 465 S.W.2d 933, 937 (Tex. 1971); Hudson Buick, Pontiac, GMC Truck v. Gooch, 7 S.W.3d 191, 197 (Tex. App. – Tyler 1999, pet. denied); Tyler Car v. Empire Fire & Marine Ins. Co., 2 S.W.3d 482, 485 (Tex. App. Tyler 1999, pet. denied); Jarrin v. Sam White Oldsmobile Co., 929 S.W.2d 21, 24 (Tex. App. – Houston [1^st Dist.] 1996, writ denied); Najarian v. David Taylor Cadillac, 705 S.W.2d 809, 811-812 (Tex. App. – Houston [1^st Dist.] 1986, no writ).   If proven that the dealer was acting as the agent of the floorplanner in selling the vehicle, a number of courts have recognized  that the innocent consumer who purchased from the dealer is entitled to retain possession and to receive title, even if COTA was violated in the process.   Morey v. Page, 802 S.W.2d 779, 784 (Tex. App. – Dallas 1990, no writ); IFG Leasing Co. v. Ellis, 748 S.W.2d 564, 566 (Tex. App. Houston [1^st Dist.] 1988, no writ); Cash v. Lebowitz, 734 S.W.2d 396, 398 (Tex. App. – Dallas 1987, writ ref’d n.r.e.); Jim Stephenson Motor Co., Inc. v. Amundson, 711 S.W.2d 665, 669 (Tex. App. – Dallas 1986, writ ref’d n.r.e.); Pfluger v. Colquitt, 620 S.W.2d 739, 743 (Tex. Civ. App. – Dallas 1981, writ ref’d n.r.e.).   These courts recognize that if A (the dealer), as agent of B (e.g., the floorplanner), was authorized to sell a vehicle to C (the buyer), the sale would be effective as between B, the actual seller, and C, the buyer. Morey, 802 S.W.2d at 784.   Under these circumstances, the floorplanner would bear the risk of loss associated with its own agent’s faithlessness.   Cash, 734 S.W.2d at 399; Pfluger, 620 S.W.2d at 743.   In other words, the floorplanner then would bear the loss of the money that the dealer failed to pass on to the floorplanner following the sale.

This agency exception to the general rule requiring compliance with COTA gives some protection to innocent consumer-purchasers, but not always.   In Morey v. Page, for example, the Dallas Court of Appeals found inadequate evidence of agency.   In that case, Page consigned a 1967 Bentley for sale by Yardley under the stipulation that he recover a $20,000 net profit.   Yardley then negotiated the sale of the Bentley to Morey for only $9,000, and Yardley absconded with these funds.   The Dallas Court of Appeals found no express authority for the sale due to the failure to meet the consignment condition of a $20,000 net return and no apparent authority due to the fact that Yardley never disclosed that he was acting on behalf of Page.   Morey, 802 S.W.2d 782-785.   Given the fact that the strength of the evidence in favor of agency will vary greatly from case, this exception provides at best an uncertain lifeline to innocent purchasers.   If the innocent purchaser is buying from a licensed dealer, in a transaction that has the appearance of a sale in the ordinary course of the dealer’s business, why should the validity of the sale be dependent upon a prior transaction between the dealer and an undisclosed principal?   The Texas Uniform Commercial Code provides rules of priority that protect buyers in the ordinary course of business in such circumstances.

2.         UCC alternative

If the UCC applies in the context of a sale out of trust by a dealer, an innocent purchaser would be accorded title and the risk of loss associated with the dealer’s defalcation would be placed squarely upon the floorplanner.   In a majority of the states, the UCC prevails over the applicable COTA in cases involving out of trust sales.   See, e.g., Madrid v. Bloomington Auto Company, Inc., 782 N.E.2d 386, 391-397 (Ind. App. 2003); Jones v. Mitchell, 816 So.2d 68, 69-72 (Ala. App. 2001); Cherry Creek Dodge, Inc. v. Carter, 733 P.2d 1024, 1027-1029 (Wyo. 1987); Dartmouth Motor Sales, Inc. v. Wilcox, 517 A.2d 804, 806-807 (N.H. 1986); Big Knob Volunteer Fire Company v. Lowe & Moyer Garage, Inc., 487 A.2d 953, 956-959 (Pa. Super. 1985);Atwood Chevrolet-Olds, Inc. v. Aberdeen Mun. School Dist., 431 So.2d 926,  927-929 (Miss. 1983); Martin v. Nager, 469 A.2d 519, 522-526 (N.J. Super. 1983); Roger D. Billings, Floor Planning, Retail Financing & Leasing in the Automobile Industry §§ 5.36 – 5.41 (West 1998).   Interestingly enough, the Texas Transportation Code specifically provides that it is to yield to the Texas Uniform Commercial Code where there is a conflict between these two bodies of law.   Tex. Transp. Code § 501.005.  Several Texas courts have recognized the U.C.C. as an alternative source of law which, unlike the agency rule, provides a bright line rule.

Innocent buyers are entitled to receive title in “out of trust” sales under two theories based on the U.C.C.   First, under Tex. Bus. & Com. Code § 2.403(a), a person “with voidable title has power to transfer a good title to a good faith purchaser for value,” and “[w]hen goods have been delivered under a transaction of purchase the purchaser has such power even though . . . the delivery was in exchange for a check which is later dishonored . . . or the delivery was procured through fraud punishable as larcenous under the criminal law.”   In effect, the courts construing these provisions have held that a purchaser who procured a good, such as a vehicle, with a check or draft that was dishonored nevertheless had voidable title to pass and that a good faith buyer from such a fraudulent purchaser was entitled to receive title.   Prestige Ford v. Dallas Postal Credit Union, 2002 Tex. App. LEXIS 974, * 11-13 (Tex. App. – Dallas 2002)(dishonored draft); Perry v. Breland, 16 S.W.3d 182, 190 (Tex. App. – Eastland 2000, pet. denied)(dishonored check); Villa v. Alvarado State Bank, 611 S.W.2d 483, 487-488 (Tex. App. – Waco 1981, no writ)(dishonored check); Leif Johnson Ford, Inc. v. Chase National Bank, 578 S.W.2d 792, 794 (Tex. Civ. App. – Beaumont 1978, no writ)(“Section 2.403(a) gives good faith purchasers of even fraudulent buyers-transferors greater rights than the defrauded seller can assert.”).

Second, under Tex. Bus. & Com. Code § 2.403(b), the “entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in the ordinary course of business.”   UnderTex. Bus. & Com. Code § 1.201(9), a “‘buyer in the ordinary course of business’ means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker.”    Under Tex. Bus. & Com. Code § 2.401(b), title to goods passes when the seller completes physical delivery of the goods, even if a document of title is to be delivered at a different time and place.

Under an amendment to COTA passed in 1971 and intended to be a reversal of the ruling in Phil Phillips (see above) on the inapplicability of the UCC to automobile title issues, the provisions of the UCC are supposed to prevail over the Certificate of Title Act in the event of any conflict.   Tex. Transp. Code § 501.005.   This amendment should have established that §§ 2.401 and 2.403 control over the Act’s provisions which purport to void the sale of an automobile absent possession of title by the seller at the time of sale or absent a transfer of title at the time of sale.   Hudson Buick, 7 S.W.3d at 198; In re Bailey Pontiac, Inc., 139 B.R. 629, 633 n.3 (Bkrptcy. N.D. Tex.1992).

While the conflict between the UCC good faith buyer provisions and the Certificate of Title Act is clear, the Dallas Court of Appeals and a few other courts have attempted to “harmonize” the statutes and thereby avoid the resulting UCC control in the event of a conflict.   Gallas, 914 S.W.2d at 594-595; Morey, 802 S.W.2d at 783-784; Everett v. U.S. Fire Ins. Co., 653 S.W.2d 948, 950 (Tex. App. – Fort Worth 1983, no writ); Pfluger, 620 S.W.2d at 741-742; Bank One Texas N.A., 219 F.3d at 497 n. 3 (5^th Cir. 2000).   The existence of a conflict between §§ 2.401 and 2.403 of the UCC and COTA, however, is clear and the UCC should govern title disputes arising out of “out of trust” sales.   The Tyler Court of Appeals and the U.S. Bankruptcy Court for the Northern District of Texas have recognized the conflict and have given full effect to the UCC.   Hudson Buick, 7 S.W.3d at 198; In re Bailey Pontiac, Inc., 139 B.R. at 633 n. 3.   Likewise, two dissenting justices on the Dallas Court of Appeals have recognized the conflict and opined that § 2.403(b) should be given full effect.   Gallas, 914 S.W.2d at 595-601; Pfluger, 620 S.W.2d at 744-748.

3.         Recent cases finding that COTA is inapplicable

On January 27, 2003, U.S. District Judge Sim Lake of the United States District Court for the Southern District of Texas concluded that a dealer was not an “owner” for purposes of Trans. Code § 501.071 and, therefore, the failure to transfer title did not render a sale from a dealer to a retail buyer invalid under Trans. Code § 501. 073.   In re Dota, 288 B.R. 448, 455-458 (S.D. Tex. 2003).   Judge Lake further held that neither the Transportation Code nor the UCC permitted a floorplanner to assert a security interest to a vehicle held as inventory by merely retaining possession of the title.   Id. at 458-460.   Then, Judge Lake applied the UCC to find that a cash buyer was a buyer in the ordinary course of business under Tex. Bus. & Com. Code § 1.201(9) and, thereby, free to take title to a vehicle, despite having failed to demand a transfer of title at the time of sale.   Id. at 460-461.   This decision was appealed to the Fifth Circuit, but the appeal was dismissed on jurisdictional grounds.

More recently on August 27, 2004, the Corpus Christi Court of Appeals took a different tack to rule for an innocent consumer buyer.   In a classical sale out of trust involving the same dealer as in the Dota bankruptcy case, this appellate court, unlike the Dallas Court of Appeals and the 5^th Circuit Court of Appeals, found a conflict between the COTA and the UCC and then applied the UCC.   Finding the consumer to be a “buyer in the ordinary course of business,” the Court thereby affirmed the trial court’s finding that the consumer should receive title free of the bank’s inventory lien.  First National Bank of El Campo v. Buss, 2004 Tex. App. LEXIS 7831 (Tex. App. – Corpus Christi 2004).   The bank defendant apparently intends to file a petition for review with the Texas Supreme Court, as it filed for an extension of time to file such a petition on October 13, 2004.   This motion was granted and the bank has until November 1, 2004 to file its petition for review.   Should the Texas Supreme Court decide to take the case, the issues raised in the foregoing cases will finally be resolved.   How these issues will pan out before the current Texas Supreme Court is anyone’s guess.

Based on the Dota and Buss rulings, COTA would never apply to cases involving dealers who made “out of trust” sales.   Under Dota, there is no need to argue that there is a conflict between COTA and the UCC, so that the preemption provision in COTA becomes effective.   By contrast, under Buss, there is a conflict between COTA and the UCC and this means that the UCC prevails.   In short, if the Dota and Busscases are followed, the bright line of the UCC will apply to all “out of trust” cases involving dealers, and the cases applying COTA to such issues in the past can be ignored.   I certainly hope this is where the law shakes out, as the UCC provides a rule which is both more fair and more clear than COTA.

Even if Dota and Buss are not followed in the future, practitioners should expect a change in the law nevertheless.   The Conference on Uniform Laws is considering proposals for changes in the uniform COTA that would recognize the BFP rule now solely recognized in the UCC.  Should such proposed amendments to our COTA be passed by the Texas Legislature, innocent consumer-purchasers will be protected, even if our courts fail to recognize that the UCC should apply.

C.        Conclusion

In any sale out of trust case, attorneys considering representation of an injured consumer buyer should closely evaluate the facts.   First, does the dealer which sold the vehicle at issue out of trust still possess an untouched dealer bond of $25,000?   If so, has anyone else already filed and how close are they to a judgment, default or otherwise?   Second, how did the floorplanner act after discovering the default by the dealer?   Did it merely hold the title or did it act more aggressively by, for example, repossessing the vehicle at issue?   If so, is the floorplanner a deep pocket or merely a small business entity?   Third, is there a consumer finance party that purchased the dealer’s retail installment contract?   If so, you should consider whether the duty to obtain title is imposed upon the assignee of the retail installment contract, thereby allowing a consumer to sue its consumer finance lender for breach of the warranty of title under Tex. Bus. & Com. Code § 2.312 and recover damages or rescission/revocation of acceptance plus attorney’s fees.   In the right case, an attorney representing a consumer buyer in a sale out of trust case can not only obtain good results for the client but recover a decent fee as well.