Florida Lenders can be Liable for Car Dealer’s Bad Deals
Portions of this post were originally published in the Florida Bar Journal November, 2012 Volume 86, No. 9, “Lender Liability for Merchant Misconduct in Consumer Transactions” and are excerpted here with the permission and generosity of the author Ian Forsythe of Hilyard, Bogan & Palmer, P.A.
Example: Car buyer purchases a vehicle from a motor vehicle dealer, and finances the purchase by entering into a retail installment contract with the dealer. The consumer may later find out that the car was unsatisfactory, or he or she was the victim of fraud, or the merchant failed to honor certain promises related to the sale, or some other wrongful conduct on the part of the car dealer.
Nevertheless, the lender will insist upon payment, and the lender will usually assert that it is not responsible for the dealer’s misconduct. Most consumers feel helpless in this situation because the lender tells them that they have to repay the loan regardless of what the dealer did, and that their obligation to repay the loan is independent of whatever claims or defenses he or she may have against the dealer.
“In essence, the consumer feels robbed of the only realistic leverage he or she has to force the dealer to provide satisfaction — the power to withhold payment.”
There is a great deal of misconception about whether lenders (including banks, credit unions, and finance companies) are subject to the claims and defenses that a consumer has against a car dealer when the lender provides the funds to finance a consumer transaction. There are various reasons why, in most cases, lenders are subject to the claims and defenses that a consumer has against the dealer, the principal reason is usually based in the “FTC Holder Rule.”
The purpose of the FTC Holder Rule was well explained by a Florida appellate court:
- Prior to the passage of the FTC Holder Rule, many consumers were caught in a “no win” situation when the seller failed to remedy the defect either because of its unwillingness or its disappearance from the market. The institutional lenders then took advantage of protections under the holder in due course doctrine when the consumer sought to assert seller misconduct as a defense to the predator’s suit for payment on the note. The rule is expressly designed to compel creditors to either absorb seller misconduct or seek reimbursement of those costs from sellers.
In many cases, the lender’s attempt to divorce himself or herself from responsibility for the dealer’s wrongdoing is not only fundamentally unfair, but it is contrary to law. That is, despite the insistence of many lenders to the contrary, in most cases, lenders are subject to the claims and defenses that the buyer has against the seller in a consumer transaction.
Consumer Remedies - Assuming that the lender is subject to the claims and defenses that the consumer has against the dealer, what are the consumer’s remedies? In most cases, the consumer has the right not to pay the outstanding balance to the extent of the consumer’s damages. The consumer may assert those claims and defenses against the lender to reduce the amount the account debtor owes, or to a return of monies paid to the assignee, but the consumer usually does not have the right to an affirmative recovery from the assignee. In addition, Florida law explicitly provides that a buyer who has suffered damages as the result of a seller’s wrongful conduct may, upon notifying the seller, deduct his or her damages from the sales price still due under the contract.
Institutional banks and lenders often cite GMAC v. Laesser, 718 So. 2d 276 (Fla. 4th DCA 1998), for the proposition that lenders are not responsible for the misconduct of dealers. However, that case was based upon a finding by a jury that “GMAC deceptively helped the automobile dealer in question steal Laesser’s trade-in vehicle and ‘flip’ him from a car purchase into a lease.” That finding was reversed on appeal, and GMAC was awarded appellate attorneys’ fees. However, the verdict in that case was based upon a finding of independent fault on the part of GMAC, and was not based upon GMAC’s derivative liability as assignee for the acts of the dealer.
Conclusion - In most cases, despite common misconceptions, when a lender who provides financing for a consumer transaction seeks payment from the consumer, the lender is subject to the claims and defenses that the consumer has against the merchant.