When we think of financing motor vehicles in the auto industry, our minds often draw to compliance with consumer protection laws and avoiding the attention of enforcement agencies on both the state and federal level—states’ attorneys general, the Federal Trade Commission, the Consumer Financial Protection Bureau and the Department of Justice all may investigate and prosecute dealerships who take advantage of consumers in the terms for financing the sale of a motor vehicle.

The financing of motor vehicles, however, also creates dealer obligations to financial institutions and creditors, including those creditors financing vehicles as dealer inventory. A dealer’s failure to uphold obligations to creditors can create other legal troubles for that dealer. Two pending Federal court cases reveal that a dealer who makes misrepresentations when selling vehicles to a customer can have problems—ones that don’t stop at the government’s efforts to protect the little guy, but which extend to banks and other financers.

Reagor-Dykes Auto Group and Ford Motor Credit

Ford Motor Credit Company, LLC is credited with discovering a pattern of fraudulent behavior that is contributing to the collapse of a major auto dealer in Texas. Bart Reagor and Rick Dykes, the two namesakes of the Reagor-Dykes Auto Group, personally guaranteed loan agreements for floor plan financing at the Group’s various dealerships. After Ford Credit sought an emergency audit of the Dealership Group in July 2018, the Group’s CFO admitted that he had fraudulently reported the auto group’s financial information to Ford Credit. Ford Credit became suspicious of the fact that the group’s dealerships would report an unusually large amount of sales the week before each quarterly audit. Shortly after the emergency audit, the Reagor-Dykes Auto Group entities filed for bankruptcy, and Ford filed a lawsuit in the United States District Court for the Northern District of Texas, alleging that Reagor-Dykes engaged in the following practices, each of which constitute breaches of the Group’s loan agreements:

  • Reagor-Dykes sold vehicles sometimes 55 days before reporting to Ford Credit (as reflected by Department of Motor Vehicle records) in violation of the Dealerships’ obligation to repay the sale price for the vehicle within 7-day of the sale;
  • Reagor-Dykes sought floor financing for a vehicle at one dealership, then moved the vehicle to another Reagor Dykes dealership for additional floor financing; and
  • Reagor Dykes obtained floor financing for vehicles which had already been sold to customers.

Ford claims that the personal guarantees permit Ford to seek immediate compensation from Reagor and Rick Dykes as guarantors for the violations alleged. Ford filed a motion for summary judgment against the Guarantors for more than $112 million in damages plus post-judgment interest and attorneys’ fees. Ford claims that the fact that the amount owed by Reagor and Dykes is undisputed entitles Ford to immediate recovery.

Guarantors and former owners of the Auto Group, Reagor and Dykes, do not appear to deny that the fraud occurred in their responsive pleadings. They claim, however, that Ford knew about the out-of-trust sales long before the June 2018 audit. Thus, they argue that Ford actively permitted the fraudulent sales to occur and materially altered the terms of the underlying loan agreement. Under Texas law, where a creditor and debtor materially alter an agreement without the guarantor’s consent, the guarantor is absolved of liability on the debt. Reagor and Dykes argue that Ford’s knowledge and consent to the Dealerships’ fraudulent behavior relieves the Owners’ of liability on the Guarantees. The District Court‘s determination of the merits of Ford Credit’s claims and the related defenses is still pending.

Coad Toyota and Capital One

Capital One Auto is suing Missouri dealership Coad Toyota for misrepresenting the value of certain financed vehicles, seeking more than six hundred thousand dollars in damages. Capital One alleges that Coad inflated the state sales tax owed on financed vehicle purchases, represented that customers made down payments where they actually had not, and engaged in “powerbooking” (misrepresenting the existence of vehicle features or options in order to inflate the overall value of the vehicle). As a result, Capital One claims that it suffered monetary losses in the form of diminished value of the liens it holds on those vehicles. Should Capital repossess a customer’s vehicle on default, Capital One may not be able to recover all that they are owed because the resale value of the vehicle would not fully cover the balance. Coad has until April 29, 2019 to file an answer to Capital One’s Complaint.

It is important to remind dealership employees involved in sales and financing that despite the pressure to make sales happen, they should always provide truthful information in the sales documents. Fudging the numbers might seem to help a customer in the moment, but the potential effects of such misrepresentations can damage the dealership’s relationships with financers and can still hurt the customer later. The Federal Trade Commission notes that inflating the numbers for a borrower to obtain approval for a loan increases that borrower’s risk of default by obligating them to greater debt than they may be able handle. Additionally, when a purchase money loan is secured by a vehicle whose true value does not cover the amount borrowed, there is greater risk that the lender will need to obtain a deficiency judgment against the customer even after repossession to cover the amount owed on the loan. In the end, no one wins when the value of a transaction is inflated.

Moreover, both cases demonstrate the importance of reporting accurate information to all third parties in relation to a transaction, including the relevant state agencies. Both Ford Credit and Capital One cite information that the dealers reported to state agencies as evidence of fraudulent activity. Both dealerships are facing or likely to face additional problems correcting the bad information they provided to the agencies and any violations that may result.

Pennsylvania already counted itself as one of the more than 30 states with autonomous vehicle laws; however, the Platooning and Highly Automated Vehicles Act (the “Act”), signed into law by Governor Tom Wolf on October 24, 2018, provided a glimpse of where automated vehicles are already operating in our society.  While immense public attention has been poured on autonomous personal vehicle development and testing, the Act highlighted that the commercial space is where our economy can and will more quickly benefit from autonomously operating of vehicles.

The Act established the Highly Automated Vehicle Advisory Committee to advise PennDOT with respect to technical guidelines, best practices and methods of overseeing the development, and eventual introduction, of highly automated vehicles.  The creation of this Committee followed the Autonomous Vehicle Policy Task Force, whose final report establishing testing guidelines for autonomous vehicles in the Commonwealth was published in November 2016.

In addition to forming that Committee, the Act made two additions to existing law on the use of autonomous vehicles in the Commonwealth.  First, the Act added authorizations for PennDOT and the Turnpike Commission to create highly automated work zones, in which highly automated work zone vehicles may be used in conjunction with construction and repair projects.  Specifically, a “highly automated work zone vehicle” was defined in the Act as “[a] motor vehicle used in an active work zone, as implemented by the department or the Pennsylvania Turnpike Commission, as applicable, which is: (1)  equipped with an automated driving system; or (2)  connected by wireless communication or other technology to another vehicle allowing for coordinated or controlled movement.  PennDOT requested this authority in order to pilot  autonomous truck mounted attenuators, which are vehicles positioned at the beginning of construction zones to shield workers from collisions.  The Act, however, granted substantially broader authority to use autonomous vehicles in work zones.  The language in the Act covered any use of such vehicles, including those types of automated construction equipment already on the market.

Finally, the Act authorized PennDOT to regulate “platooning” and authorized platooning on certain Commonwealth roadways, including the Turnpike.  Platooning was defined as the act of operating a number of autonomous or semi-autonomous vehicles in a convoy with each vehicle following closely to the vehicle in front of it.  This addition contemplated a lead vehicle operated by a human driver with autonomous vehicles following along in a line.  As automation takes hold, trucking companies and the military will reduce costs by having a single driver leading a convoy of autonomous vehicles.  For now, platoons were limited to 3 vehicles, with the first being operated by a human.  That number, however, will likely increase as these technologies are more widely utilized and proven.

With the passage of the Act and the successful completion of the second annual Pennsylvania Automated Vehicle Summit in 2018, Pennsylvania made clear its intention to remain at the forefront of autonomous vehicle development.

I don’t have a Great Aunt Edna and if I did, she probably wouldn’t have a Snap account but you, your parents and your children likely have Facebook accounts with cherished family photos and other digital memories.  Our burgeoning online activity creates troves of so-called ‘digital’ assets, some of which may be every bit as valuable (if not more so) than your grandparents’ china and silver. At death, access to these digital assets poses many challenges.

The task of an executor has always been to identify the decedent’s assets, pay the decedent’s liabilities and debts, and distribute the decedent’s assets pursuant to the terms of the Last Will and Testament. Traditionally, this process generally involved a search of the decedent’s records.  Accounts and bills were identified through stored records or subsequently received mail.   An Agent acting under a Power of Attorney has similar responsibilities.  Password protected accounts makes even identifying these assets harder.

A working definition of “digital assets” generally include digitally stored content, online accounts and files stored on digital devices, such as computers and smartphones. In addition, accounts managed and maintained on the internet, such as e-mail, social media Facebook, Twitter) online payments applications (PayPal, Square), online shopping accounts, and online storage accounts all constitute “digital assets.”

In 2014, we alerted our estate planning clients as to the importance of updating estate plan documents to give fiduciaries (agents under Powers of Attorney, Executors under Wills) the power to manage these assets.  As of 2019, laws authorizing the delegation of such powers have matured.  Many states, but not yet Pennsylvania, have adopted a version of the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which recognizes digital assets as property that can be managed preserved and, in some cases, accessed by third parties following death or incapacity.

For more information on managing your digital assets and the importance of having proper planning in place, see our May 2014 article, a recent Forbes article, and a useful summary of RUFADAA.  Contact any member of the Auto Dealer Practice Group with questions about your estate planning.

 

Additional credit for this article goes to Andrew Rusniak, Esquire, McNees Wallace & Nurick LLC.

Just completed your estate planning?  Let’s be sure.  You have a Will?  Super.  Powers of Attorney?  Terrific.  Living Will?  Excellent.  Now, have you checked the designations on your retirement plan?  Life insurance?  Health Savings Accounts?

While a Will remains a critical part of an estate plan, it doesn’t get the whole job done for most modern estates.  For dealership owners, executives, and managers, a retirement plan (an IRA, 401(k) or the like) likely represents significant value.  Disposition of these accounts is directed primarily, if not exclusively, through beneficiary designations and not through a Will.  Other employment-related benefits such as dealership group term life insurance and health care savings accounts also pass by their beneficiary designations.  Significantly for dealers, the proceeds of life insurance acquired as security for financing, or for key-man or buy-sell purposes, will pass only by beneficiary designations even where a stock purchase agreement or loan document directs use of the proceeds.  In short, whatever your Will says, it generally has no effect on assets with beneficiary designations.

Having no designated beneficiary, naming the wrong person or not having a contingent beneficiary designated are three common scenarios we see.  Each can have significant negative consequences.  For tax purposes, because most retirement plans are funded with after-tax dollars, naming the right beneficiary affords the opportunity to defer taxable income and minimize tax.  Failing to update beneficiaries after significant life events such as divorce or death of a spouse or child can result in plan benefits being paid to the wrong person or to a minor for whom a guardianship may need to be established through the courts.  While making these arrangements, it is best to check that beneficiaries named in other places (i.e. your dealer franchise agreement) are up-to-date and match the estate plan set forth in your Will.

More complex estate planning requires focused coordination between beneficiary designations and Will or Trust provisions.  This sort of planning can protect vulnerable beneficiaries (young children or beneficiaries with special needs or a history of substance abuse or mental health challenges).  Second marriages may necessitate special attention to planning with retirement plan assets and insurance to balance the beneficial interests of spouses and children.  But whether your estate requires complex or simple planning, your plan is not complete without consideration of those all-important beneficiary designations.

Always consult your professional advisors on the tax and distribution implication for naming beneficiaries.

With the current administration, we have continued to see an evolution of less enforcement at the Consumer Financial Protection Bureau.  Cheers for this change should be kept in check because it may be causing state enforcement agencies to be more active in consumer financing areas.  Previously, there was collaboration between the CFPB and state agencies; that has not been true in this administration.  Rather, states are now leading their own initiatives.

The PA Office of Attorney General has broad authority to enforce consumer protection matters.  The PA Department of Banking and Securities has similar authority in any transaction involving lending.  And, some state Legislatures have shown interest in legislative or regulatory enhancements in this area.

Historically, state resources for this enforcement have been limited.  With the shift in CFPB enforcement, however, states seem to be finding new resources or reallocating resources to address many issues previously handled by CFPB.  It is also possible that we will see more pooling of resources among states as they look toward initiatives that lend themselves to multistate enforcement – one state leading an effort in which other states can tag along.

Auto finance remains high on the list of priorities and concerns for state enforcement agencies; specifically, sub-prime lending practices, concern for a borrower’s ability to repay the debt, and unfair/deceptive acts and practices.  Don’t let your guard down because CFPB has minimized its efforts.  In fact, in light of states’ renewed interest in this area, ramping up compliance may be in order as states have more enforcement authority over the auto industry than CFPB.

New audit rules put into place by the Internal Revenue Service (the “IRS”) at the beginning of this year will have an impact on tax partnerships which may have significant ramifications for some dealers. Historically, many dealers put their dealership and real estate assets into entities that are taxed as “pass through” entities for tax purposes. The S corporation was the preferred form for the dealership entity, and limited partnerships were used for holding real estate. More recently, the limited liability company has come into its own as an entity for holding both real estate and dealership operations. For tax purposes, limited partnerships are taxed as partnerships, and most multiple-member limited liability companies are as well.

Under the prior partnership tax rules, if the Internal Revenue Service audited a tax partnership and found a deficiency, they would have to assess the deficiency against each partner individually for their share. Under the new rules, the IRS may assess and collect any tax obligation owed as a result of an audit at the partnership level, regardless of the relative ownership of the partners. In stark contrast to the previous tax regime, the IRS will no longer have to chase after all of the partners.

For entities that have a single owner, or whose ownership has remained unchanged between the tax year being audited and the date of the audit, this rule does not represent a significant change in any partner’s tax liability. Where an entity undergoes a change in ownership, however, the current owners will end up paying, through the partnership, the tax liability of the former partners. Even where a partner has not left the partnership, where there has been a change in the ownership percentages of the partners, some partners will effectively be paying for tax liabilities that should have been paid by other partners.

For tax partnerships that were formed before the change in the law, the language in their existing governing documents is unlikely to address the new rules. Most tax partnerships are eligible to opt out of this treatment, but the governing documents for the tax partnership need to be clear on how the determination to opt out is made. The election to opt out is an annual election that has to be made as part of filing the tax partnership’s tax return, and the governing documents for the entity will have to be amended to provide for this election to be made. Additionally, the new rules replace the previous concept of “Tax Matters Partner” with a new “Partnership Representative” who will represent the tax partnership in all aspects of an IRS audit.

The new rules give this Partnership Representative broad powers to act unilaterally on behalf of the tax partnership under the audit rules. This broad authority can be modified by the entity’s governing documents, for example, to provide that the Partnership Representative must obtain the consent of a certain percentage of the owners before agreeing to extend the statute of limitations, or agreeing to a settlement with IRS. The governing documents should also address the selection and removal of the Partnership Representative. If a Partnership Representative is not appointed by the tax partnership, the IRS has the authority to appoint someone of its choosing to act in that capacity.

The new audit rules introduced substantial complexity in an attempt to provide flexibility to tax partnerships in dealing with partnership level tax assessments. The Partnership Representative, who is charged in dealing with the IRS throughout the audit process, may need certain information from the owners in order to determine which alternative is best for the partnership and its owners in dealing with an assessment of additional tax. The Partnership Representative will also need the ability to require the owners to take certain actions, such as filing amended returns or paying their portion of the tax assessment directly to the IRS. Where a partner does not comply, the operative documents must also provide for an appropriate remedy for the other partners.

Because the Partnership Representative will have broad authority to act on behalf of the partnership, the question of indemnifying that person becomes important. Where the decisions made by the Partnership Representative affect each owner differently, there is the possibility for disgruntled owners to make a claim against the Partnership Representative. The concern of personal liability of the Partnership Representative should be evaluated on a case by case basis; however, like with Tax Matters Partners under the old rules, indemnification of the Partnership Representative is likely appropriate, so long as they carry out their duties in good faith and within the terms of the governing document.

Additional issues arise when there is a transfer of ownership in the partnership. Where an owner has exited a partnership or there has been change in percentage ownership, the agreement must address the issue of what happens if there is an audit of a pre-sale or pre-transfer tax year. Changes in tax liability for tax years before the transfer may assess additional liability to someone who is no longer an owner. That liability may fall on new owners who did not gain any benefit from those tax years, without some requirement that the prior owner pay his or her share for tax years during which they were partners. Any sale or transfer document of an interest in a tax partnership must now contain provisions addressing this possibility.

Dealers owning their dealership or real estate through an entity taxed as a partnership should review their partnership or limited liability company agreements to make certain that they adequately deal with these new rules.

Governor Wolf recently signed Act 59 of 2018 which amends the Pennsylvania Board of Vehicles Act (“BOVA”). The amendments to BOVA are effective on August 27, 2018 and significantly enhance the protections provided to Pennsylvania new car and truck dealers. The significant enhancements to BOVA are outlined below and continue to help level the playing field between new car and truck dealers and their manufacturers.

Vehicle Recalls.
Act 59 provides compensation to dealers in the event of certain vehicle recalls. In addition to requiring manufacturers to compensate its same line make new vehicle dealers for all labor and parts required to perform recall repairs, there is also compensation available where the dealer is unable to repair the vehicle within thirty (30) days and the manufacturer has issued a “stop sale order” or a “do not drive order” on the vehicle. In that event, the manufacturer is required to compensate the dealer at a prorated rate of at least 1.5% of the value of the vehicle per month. The right to compensation begins thirty (30) days after the date on which the stop sale order or do not drive order was provided to the dealer.

Act 59 provides that the value of a used vehicle shall be the average trade-in vehicle as indicated in an independent third-party guide. Any claim for reimbursement will be treated the same as a warranty reimbursement claim and therefore must be paid or denied within thirty (30) days after submittal of the claim. A manufacturer does have the right to compensate its dealers under a different program if that program provides compensation equal or greater than that provided under BOVA. There are several other requirements that should be considered but this enhancement to BOVA provides a statutory process to secure compensation.

Dealers should note that the existence of any open, unremedied recalls must be disclosed to a retail purchaser. The dealer should provide the purchaser with a copy of a report obtained from the Internet website safercar.gov. If the dealer does so, it will be deemed to have satisfied this requirement. In the event that a dealer fails to do this (whether a new or used vehicle dealer), there is a maximum fine of $1,000.00 for multiple offenses.

Limits on Facility Modification Requirement.
Over the last 10 to 15 years, facility modification requirements by manufacturers have been a sore point for dealers. Act 59 now limits the ability of a manufacturer to require the expansion, construction or significant modification of facilities within 10 years after the date that the facility had been constructed or any significant image, upgrade or remodeling had occurred. This provision also applies to any successor dealer who has been approved by the manufacturer. A manufacturer may still continue any programs currently in existence, provide facility assistance payments or provide reimbursement for certain cost of making improvements including purchases of goods, signage or an image element.

Temporary Licensure.
Recently, it has become more difficult for dealers to secure a dealer license. Significant delays have been encountered which has caused disruption to a dealer’s business. Act 59 now provides that a temporary permit may be issued to a new vehicle dealer in order to operate. The temporary permit expires at the end of 45 days from the date of closing and allows the dealer to submit after closing such items as a franchise approval letter, telephone business line information, certificate of occupancy, and the lease or deed for the real property. Each of these items has been difficult to obtain (if not impossible) prior to closing and has in some cases significantly delayed the issuance of a permanent license. This temporary permit will allow the new vehicle dealer to immediately engage in the sale and lease of new and used motor vehicles. In order to avoid issues with the issuance of the temporary permit, it is recommended that the dealer submit the necessary paperwork 30 to 60 days in advance of the anticipated closing.

In the event you are in a situation where you need to invoke one or more of these protections, we strongly recommend that you consult with experienced dealer counsel.

Having recently advised clients in commercial transactions where one or more parties lacked legal capacity, we were reminded of the essential role of Durable General Powers of Attorney in an estate plan. Though none of us wants to think about ourselves or our older family members losing mental capacity, we have to accept that it does happen. When the family matriarch can no longer make sound business decisions she needs to rely on a substitute decision maker to manage her interests. Without advance planning to appoint an Agent under a power of attorney, the only solution may be to petition the local court to declare the matriarch incapacitated and appoint a person or a financial institution as guardian. That’s a time-consuming and potentially expensive process involving family doctors, lawyers and a court hearing. When the time comes to sell a business interest or real estate, the guardian will have to seek separate court approval, resulting in more delay and more expense.

A Durable General Power of Attorney (“DGPOA”) can in most cases, avoid that cost and delay. Under a DGPOA, a person (the “Principal”) appoints one or more other persons as “Agent” to exercise certain powers on behalf of the Principal relating to financial and business matters, all for the benefit of the Principal. Crucially, the DGPOA is effective after the Principal lacks legal capacity. If and when the Principal loses capacity or the willingness to conduct financial or business dealing, the Agent steps in to assist or make decisions for the Principal.

Every Dealer and every owner of corporate stock or other equity interests in a dealership entity should have a DGPOA. An Agent acting under a DGPOA has the discretionary authority to vote the stock to approve mergers and acquisitions, sell real estate and manage other dealership matters without court approval. By making an early decision about who should step in if necessary, the Principal executing a DGPOA saves valuable time and the very real costs of working through a guardianship later on.

In 2014, Pennsylvania enacted significant changes to the law governing Powers of Attorney which changes became effective January 1, 2015. We advise our auto dealer and other business clients on the inclusion of effective and flexible DGPOAs in their succession plans. We encourage clients to review existing documents and can assist in determining if revisions are needed.

Questions involving DGPOAs in particular or business succession planning in general may be directed to any member of McNees’ Auto Dealer Practice Group.

Surely, a vehicle dealership cannot imagine functioning without its inspection licenses. Yet, in the past year I have seen dozens of state inspection licenses (safety and emission) have suspensions imposed for sticker security concerns. Part of the reason this happens is because a first violation of inspection sticker security is a warning, so often it is not seen as a serious threat to a license. However, when that second violation occurs, the penalty is a three-month suspension of the inspection license. Now everyone is at attention.

In my many years of practicing law, I have never seen PennDOT as aggressive with sticker security issues as they are of late. If you have not done so, now would be an excellent time to review your sticker security obligations and practices, to hopefully avoid even the first offense for sticker security concerns. The law requires licensed inspection stations to do the following relative to sticker security:

  • A record must be kept of every inspection sticker issued – the sticker number issued for a vehicle should be noted both on the customer repair order and in the station’s inspection log (MV-431).
  • Retain certificate of inspection requisition forms for each campaign – retain these for a minimum of three years.
  • Upon receipt of stickers from PennDOT, audit the order against what was received. Report any errors, no matter how slight, to PennDOT’s Vehicle Control Division.
  • Retain the old sticker when replacing a sticker – typically, this will still be affixed to the portion of the windshield cut out when replacing the windshield. The Quality Assurance Officer (“QAO”) will ask to see these old stickers during each audit visit. We recommend retaining these under lock and key so that they are easily available when the QAO conducts the station audit.
  • All inspection certificates and temporary inspection approval indicators must be kept under lock and key in a safe place.
  • Retain all unused certificates of inspection; they will be reviewed during the QAO audit.

During a QAO audit, the station must be able to account for every sticker it was issued. If a station cannot do this, the high likelihood is that PennDOT will assert a sticker security violation. To ensure the highest level of sticker security compliance possible, we recommend the following steps:

  1. Retain all inspection stickers (unused, current campaign, voided, replaced) in a locked safe, accessible only by several people, typically management level or service advisors.
  2. Require technicians to request a sticker only upon completion of an inspection and provide technicians with only one sticker at a time.
  3. Audit records routinely, preferably every day but no less than once per week, to ensure that all stickers can be accounted for and that the records of all stickers issued are complete.
  4. Retain sticker requisition forms and sticker order receipts under lock and key.
  5. Audit all stickers received, to be sure you received what was ordered and not less than or more than was ordered. Report any concerns regarding stickers received (or not received) to PennDOT’s Vehicle Control Division immediately.
  6. Report any concerns regarding missing stickers or sticker security generally to your QAO upon discovery.
  7. In the event any stickers go missing, we recommend an immediate internal investigation be conducted. If it is believed stickers have been stolen, law enforcement should be contacted – retain all police and internal investigation reports.

You cannot be too vigilant with inspection sticker security. Even doing so, you may have stickers go missing or for which you cannot account during an audit. However, the likelihood of that happening is lessened with good accountability on the front end, which can also mitigate penalties in the event there is a breakdown in sticker security.