In Nelson v. Pearson Ford Co., — Cal.Rptr.3d —-, 2010 WL 2779307 (2010), the California Court of Appeal dealt with the issue of re-written contracts, the “single-document rule”, and remedies available under the Rees-Levering Automobile Sales Finance Act. In Nelson, the Dealer sold car to buyer on Day 1. The original contract was signed that day and the customer drove away in the vehicle. On Day 8, the Dealer called the customer to return; the contract was rescinded and dated back to Day 1.
The TILA disclosures on the contract written on Day 8, including the APR calculation, were based on interest accruing from Day 1. However, since the second contract was not signed until Day 8, the additional days of interest caused the APR to increase–an increase that the Court of Appeal held that the second contract did not properly disclose and which increased the APR beyond TILA’s 0.125% tolerance for errors. (See Rucker v. Sheehy Alexandria, Inc. (E.D. Va. 2002) 228 F.Supp.2d 711, 717; Rucker v. Sheehy Alexandria, Inc. (E.D. Va. 2003) 244 F.Supp.2d 618, 620. Even though ASFA requires compliance with Reg. Z, a violation of Reg. Z does not, alone, give rise to ASFA’s remedies. Nevertheless, the violation of Civ. Code 2982(a) rendered the contract voidable under Civ. Code 2983. The Court of Appeal instructed that if financing falls through on a spot delivery deal, the dealer should charge a rental fee for the period between contracts, not backdate the second contract to the date of the initial one, charging interest on the financed balance during that period pre-consummation of the second contract.
The Court also held that the dealer violated the single document rule by requiring the buyer to sign a separate acknowledgement that the original contract was rescinded. The dealer also had arranged the sale of hazard insurance. By including the hazard insurance premium in the amount financed as part of the car price, rather than listing the premium as a separate line item in the Rees-Levering contract as required by Civil Code 2982(a)(3), the buyer had to pay sales tax and finance charges on the insurance premiums. The Court of Appeal held that including the insurance premium in the amount financed rendered insurance a part of the car agreement, and since the insurance policy was embodied in a separate agreement, the dealer violated the single document rule, thus rendering the entire contract subject to rescission under Civil Code 2983.
As to remedies, the Court of Appeal held that if the dealer violates the single document rule (Civ. Code 2981.9) or subdivisions (a), (j) or (k) of section 2982, the buyer may rescind and recover the full amount paid under the contract. (Civ. Code 2983.) The Court of Appeal held that section 2983 must be read together with the last paragraph of section 2983.1 so that in order to obtain rescission (and return of sums paid under the contract), the buyer must return the car. While the dealer may not obtain an offset for loss of car value due to the passage of time, the dealer is entitled to an offset for the buyer’s use of the car. The Court of Appeal did not instruct how to calculate the offset, but says that it should be subject to equitable considerations so that a buyer is not charged for use of the car if the buyer returns the car early in the contract period due to the dealer’s violation of the statute, but the dealer refuses to rescind, forcing drawn out litigation during which the buyer has no choice but to use the car.