In Raceway Ford Cases, — Cal.Rptr.3d —-, 2014 WL 4589808 (Cal.App. 4 Dist. 2014), the Court of Appeal reversed the trial court’s finding in favor of defendant car dealer as to backdating claims, but remanded to the trial court to determine whether the action could still be maintained as a class action.  The Court of Appeal’s decision is important because of its finding that, under AFSA, certain technical violations go to formation rather than substance of the contract and, therefore, are afforded no remedy under AFSA.

For some of its customers, Raceway acts not only as seller of a vehicle, but also as creditor, by extending financing for the sale. Generally, Raceway then attempts to assign the finance contract to a commercial lender. Sometimes, after the contract for the sale and financing has been signed and the customer has taken delivery of the vehicle, Raceway has later entered into a second or subsequent contract with the customer for the same vehicle. This occurred on some occasions when commercial lenders were unwilling to accept assignment of the contract on the terms Raceway had agreed to with its customer; in that case, Raceway could contact the customer and request to renegotiate the terms of the sale and financing.FN3 Alternatively, a customer could initiate a renegotiation with Raceway, for example, because he or she had regrets about the initial terms.  Plaintiffs’ backdating claims arise from the circumstance that, prior to late 2004, it was Raceway’s practice to date second or subsequent contracts negotiated with customers using the date of the initial contract. A customer who agreed to enter into a second or subsequent contract with Raceway would sign not only a new purchase contract, dated to the initial date of sale, but also an “Acknowledgement of Rescinded Contract” or “Acknowledgement of Rewritten Contract,” which also was backdated to the date as the original contract. The acknowledgements state that the original contract has been “ ‘rescinded (canceled) such that no obligations shall be owed by either party under the original contract.’ ”  The trial court certified a class, referred to as “Class One” or the “Backdating Class” by the parties, consisting of “[a]ll persons who, since January 12, 2001, (1) purchased a vehicle from Raceway Ford, for personal use, (2) on a later date rescinded their original purchase contract, and (3) signed a subsequent or second contract for the purchase of the same vehicle, which contract was dated the date of the original purchase contract and involved financing at an annual percentage rate greater than 0.00%.” There are, according to plaintiffs, approximately 1100 members of Class One.  At trial, Class One asserted claims under the ASFA, CLRA, and UCL based on the practice of backdating described above. The trial court found in favor of Raceway on all claims; its reasoning in support of this ruling will be discussed below.

The Court of Appeal reversed the trial court’s ruling in favor of Raceway, but declined to enter judgment in favor of the Plaintiffs.

Regulation Z provides that “[t]he term of the transaction begins on the date of its consummation, except that if the finance charge or any portion of it is earned beginning on a later date, the term begins on the later date.” FN12 (12 C.F.R. § 226, appen. J(b)(2) (2014).) Consummation is defined as “the time that a consumer becomes contractually obligated on a credit transaction.” ( 12 C.F.R. § 226.2(a)(13) (2014).) When a consumer “becomes contractually obligated on a credit transaction” ( ibid.) is determined, in turn, by state law. (Official staff interpretations, 12 C.F.R. § 226, supp. I, subpt. A(2)(a)(13)(1) (2014) [“ State law governs. When a contractual obligation on the consumer’s part is created is a matter to be determined under applicable law; Regulation Z does not make this determination….”].) . . .  Thus, the trial court erred when it looked to Vehicle Code section 5901, and concluded that “[a] rewritten contract does not generate a new consummation date under either federal or state law, …” commenting that “no statute or case tells us that [the original] consummation does not continue in effect while the buyer keeps the car and the contract is rewritten….” This reasoning inappropriately muddles together consummation of the sale with consummation of the credit transaction. (See Official staff interpretations, 12 C.F.R. § 226, supp. I, subpt. A(2)(a)(13)(2) (2014).) There is no question that, when customers in Class One first signed a contract with Raceway and took delivery of their vehicles, a sale was consummated in the meaning of Vehicle Code section 5901. And the customers also then became legally committed to a particular credit transaction. They did not become legally obligated to the terms of the credit transaction embodied in their second or subsequent contract with Raceway, however, until that second or subsequent contract was signed. (See, e.g., Janikowski, supra, 210 F.3d at p. 767 & fn. 3.) Thus, the date the second or subsequent contract was signed would normally be the appropriate date to use as the beginning of the term for purposes of calculating the APR of the second or subsequent contract’s credit transaction, under the method required by Regulation Z. That was not Raceway’s practice: instead, the APR of a second or subsequent contract would be calculated using the same dates as the initial contract.  Nevertheless, judgment in favor of plaintiffs is not necessarily appropriate in all cases of backdating by Raceway. Regulation Z contemplates certain circumstances where a second or subsequent contract between a buyer and a seller does not trigger any requirement for further disclosures, including with respect to APR. As a general rule, where “an existing obligation” subject to Regulation Z “is satisfied and replaced by a new obligation undertaken by the same consumer,” it is considered to be a “refinancing.” FN13 ( 12 C.F.R. § 226.20(a) (2014).) “A refinancing is a new transaction requiring new disclosures to the consumer.” ( Ibid.; see also official staff interpretations, 12 C.F.R. § 226, supp. I, subpt. C(20)(a) (2014) [“A refinancing is a new transaction requiring a complete new set of disclosures.”].) This general rule, however, is subject to five explicit exceptions, wherein an existing obligation is replaced by a new obligation undertaken by the same consumer, but the transaction nevertheless “shall not be treated as a refinancing.” ( 12 C.F.R. § 226.20(a)(1)-(5).) At least one of these exceptions is potentially relevant in this case: “A reduction in the annual percentage rate with a corresponding change in the payment schedule.” ( 12 C.F.R. § 226.20, subd. (a)(2).) The official staff interpretations of Regulation Z explain that “[a] corresponding change in the payment schedule to implement a lower annual percentage rate would be a shortening of the maturity, or a reduction in the payment amount or the number of payments of an obligation.” (Official staff interpretations, 12 C.F.R. § 226, supp. I, subpt. C(20)(a)(2) (2014); see also Krenisky v. Rollins Protective Services Co. (2d Cir.1984) 728 F.2d 64, 66–67 ( Krenisky ) [“The protections extended to consumers against creditor overreaching are not compromised by non-disclosure of unilateral reductions in credit terms.”].) Thus, a second or subsequent contract entered into between Raceway and a customer regarding the same vehicle would generally be considered a “refinancing,” triggering a requirement for new disclosures. But if the second contract is identical to the first, except that the APR is reduced with a corresponding change in the payment schedule, there would be no “refinancing” in the meaning of Regulation Z, and no new disclosures would be required at all with respect to the terms of the new contract.  In addition, Regulation Z allows for a small margin of error with respect to calculation of the APR. A disclosed APR is “considered accurate” under Regulation Z if it is “not more than 1/8 of 1 percentage point above or below” the rate determined utilizing the authorized methods. (12 C.F.R. § 226.22(a)(2) (2014).) Thus, a second or subsequent contract that is backdated only a short period of time could conceivably fall within the margin of error allowed by Regulation Z, even though the disclosed APR was calculated using a date earlier than the date the contract was signed. Several of the allegedly backdated contracts introduced into the record below were apparently backdated by no more than one day. . . .  Nevertheless, we will not order that judgment be entered instead in favor of Class One, as plaintiffs have requested. We reject plaintiffs’ contention that any interest calculated from prior to the actual date of signing of the backdated contracts constitutes an illegal finance charge. The only potential violation shown by plaintiffs is an inaccurately calculated APR, which would violate Regulation Z and, by virtue of Regulation Z’s incorporation by reference into the unlettered first paragraph of section 2982, would violate the ASFA. But although the disclosed APR on second or subsequent contracts of some class members may have fallen outside the margin of error allowed by Regulation Z, that may not be so for all class members. It is also possible that the only change between some class members’ initial contract and their second or subsequent contract was a lowering of the APR. Such a second or subsequent contract would not be a “refinancing” in the meaning of Regulation Z, and no additional disclosures beyond those relating to the first contract would be required. We therefore remand to the trial court to determine in the first instance how best to adjudicate the case given the potentially differing circumstances of the various members of the backdating class, as it is currently defined,FN16 and to conduct any necessary further proceedings.  [FN16. Among other things, the trial court will have to determine whether class resolution of plaintiffs’ backdating claims remains appropriate, and if so what measures—perhaps redefinition of the class, or formation of subclasses, for example—may be needed to facilitate adjudication of the claims.]

The Court of Appeal found that the violation of the Single Document Rule afforded no remedy under the AFSA:

Turning now to section 2981.9: This section of the ASFA contains, among other things, the “single document rule,” requiring that “all of the agreements of the buyer and seller with respect to the total cost and the terms of payment for the motor vehicle” be contained “in a single document.” (§ 2981.9; see Nelson, supra, 186 Cal.App.4th at p. 1004.) The purpose of the single document rule is to facilitate the consumer’s review of the parties’ agreement by forbidding the potentially confusing practice of making disclosures by reference to information contained only in documents other than the contract itself. (See 92 Ops.Cal.Atty.Gen. 97, *6, 7 (2009) [“the purpose of the single document rule [is] the facilitation of the consumer’s review of all of the parties’ agreements before the consumer signs the sale or lease contract, so that the consumer has complete and accurate information.”].) The single document rule is, at bottom, a technical rule about document format—a reading buttressed by the circumstance that it appears in a sentence dictating what font size may be used in the contract. (§ 2981.9 [“Every conditional sale contract subject to this chapter shall be in writing and, if printed, shall be printed in type no smaller than 6–point, and shall contain in a single document all of the agreements of the buyer and seller with respect to the total cost and the terms of payment for the motor vehicle, including any promissory notes or any other evidences of indebtedness.” (Italics added.) ].) It is questionable whether a formatting rule should have any applicability to alleged inaccuracies in the substance of the document.   Nelson holds that a backdated second contract for a vehicle, similar to those at issue in this case, violates the single document rule because such a document does not contain “ ‘all of the agreements of the buyer and seller with respect to the total cost and the terms of payment for the motor vehicle.’ ” ( Nelson, supra, 186 Cal.App.4th at p. 1004.) The Nelson court observes that a reviewer presented with an original contract and a backdated second contract would not be able to tell, on the basis of the documents alone, which is the operative contract, the date the operative second contract was actually consummated, or whether the buyer had paid a finance charge with respect to a period of time prior to consummation. ( Ibid.) It rejects the argument that the second contract contains all the required information, because the consummation date, which is “an essential fact in calculating an accurate APR,” does not appear on the face of that contract, and the APR disclosed therein is inaccurate, so the “disclosure itself is meaningless and the informational purpose of the ASFA is not served.” ( Ibid.)  We are not persuaded, because Nelson ‘s reasoning is flawed in multiple respects. First, we have already rejected Nelson ‘s erroneous conclusions regarding “preconsummation” finance charges. Second, the purpose of the single document rule is to facilitate the consumer’s review of the parties’ agreements, not review by a third party. (See 92 Ops.Cal.Atty.Gen., supra, at pp. *6–7.) A buyer signing even a backdated contract may be presumed to know the date that they are signing it.FN18 Third, there is no specific requirement in the ASFA that all information necessary to calculate the APR be disclosed to the buyer: section 2982—via the incorporation of Regulation Z in the first unlettered paragraph—requires only that the APR itself be disclosed. (See § 2982; 15 U.S.C. § 1638, subd. (a)(4); 12 C.F.R. § 226.18(e) (2014).) Fourth, Nelson ‘s interpretation of the single document rule renders a portion of section 2983 superfluous, specifically, the reference to the disclosure requirements listed in subdivision (a) of section 2982. (See § 2983, subd. (a) [violation of any provision of § 2982, subd. (a), renders contract unenforceable]; People v. Isaac (2014) 224 Cal.App.4th 143, 148 [“Statutory interpretations rendering ‘ “any part of a statute superfluous are to be avoided.” ’ [Citation.]”].) If a contract containing an inaccurate disclosure necessarily violated the single document rule, as Nelson suggests—in addition to whatever provision requires the disclosure in the first instance—any provisions regarding specific disclosure requirements included in section 2983 would have no significance, because the contract would be unenforceable anyway for violating the single document rule.  Nelson ‘s interpretation of the single document rule stretches a rule that on its face deals with format of a contract into a rule governing the accuracy of the substance of the disclosures contained in the contract, while citing no authority in support of that expansive interpretation. (See Nelson, supra, 186 Cal.App.4th at pp. 1004–1005.) The only case cited in Nelson ‘s discussion of the single document rule is Rucker I. ( Nelson, supra, at p. 1004 .) But the portions of Rucker I cited therein consist of language cherry-picked from discussions of policy reasons underlying Regulation Z, and policy concerns raised by “the combination of spot delivery contracts and the industry practice of backdating documents to the original delivery date” and “yo-yo” sales schemes. ( Rucker I, supra, 228 F.Supp.2d at pp. 717–719.) Nothing like the single document rule is discussed anywhere in Rucker.  In short, we conclude that section 2981.9 is not implicated by the potentially inaccurate disclosures of APR caused by Raceway’s backdating of second or subsequent contracts. The single document rule governs the format of the contract, not its substance, and we reject Nelson ‘s interpretation to the contrary as unpersuasive.    Having decided that neither section 2981.9 nor subdivision (a) of section 2982 is violated by the inaccurate APR disclosures potentially at issue in this case, and therefore the contracts are not rendered unenforceable by section 2983, the question remains what remedy may be available to plaintiffs. It is not apparent that the ASFA provides any remedy at all. ( See Nelson, supra, 186 Cal.App.4th at pp. 1001–1002 [“we cannot say that the failure to afford a remedy [for a violation of Regulation Z] resulted from a legislative oversight.”].) The ASFA does not provide for statutory damages, and on its face provides for recovery of actual damages only for specific violations, not applicable here. (See, e.g., § 2983, subd. (b) [buyer entitled to actual damages sustained for violations of § 2982, subd. (a)(2) or (5) ]; § 2983.1, subd. (e) ].) In any case, the only evidence of purported actual damages submitted by plaintiffs consisted of evidence they paid “preconsummation interest.” We concluded above that “preconsummation interest” is neither illegal nor improper under Regulation Z, so “preconsummation interest” does not constitute damages.

The Court of Appeal found no CLRA violation.

In Nelson, the court concluded that a dealership violates section 1770, subdivision (a) by entering into backdated second contracts that disclose inaccurate APRs because, by doing so, the dealership represents that it has the “legal right to collect finance charges effective [the date of the original contract], an obligation prohibited by Regulation Z.” ( Nelson, supra, 186 Cal.App.4th at p. 1023.) As noted above, however, we disagree with Nelson ‘ s conclusion “preconsummation interest” constitutes an “obligation prohibited by Regulation Z.” ( Ibid.) Regulation Z governs how APR is to be calculated and disclosed to the consumer; it does not prohibit the parties from contracting for interest to be calculated from a date prior to the consummation of the contract. As such, plaintiffs’ assertion they “were obligated to pay a finance charge they were not obligated to pay” is incorrect. Nor do the contracts at issue involve an obligation that is “prohibited by law.” (See § 1770, subd. (a)(14).) We therefore affirm the trial court’s judgment in favor of Raceway with respect to Class One’s claims under the CLRA, and need not consider what remedies might be available to plaintiffs under the CLRA.

The Court of Appeal also found that the Plaintiff’s smog claims based on the purported illegal charge for smog fees on diesel vehicles did not afford the consumers a right to rescission.  The Court of Appeal explained:

We conclude it does not. Like the single document rule, discussed above, section 2982 governs the “formalities” of contracts, not their substance. (See § 2982 [entitled “Formalities of conditional sale contracts”].) Subdivsion (a) of section 2982 requires a comprehensive “itemization of the amount financed,” with specific disclosures that must be made in the contract. (§ 2982, subd. (a).) If the disclosures are made, and are true in the sense of accurately describing the terms of the parties’ agreement, then the contract comports with the requirements for the “formalities” of conditional sale contracts.    The authority cited by plaintiffs does not require the conclusion that Raceway violated the ASFA because of the charges accurately described, but erroneously included in the contracts between Raceway and the members of Class Two. Authority addressing contracts that do not accurately describe the parties’ agreement is not on point here. In Nelson, for example, the improperly calculated APR figure disclosed in the contracts at issue provided false information about the transaction—specifically, the cost of credit expressed as a yearly rate—to the consumer. ( Nelson, supra, 186 Cal.App.4th at p. 1005.) In Bratta v. Caruso Car Co. (1958) 166 Cal.App.2d 661, the contract at issue recited that the consumer had paid a cash down payment, but in fact only a promissory note for the amount of the down payment had been executed. ( Id. at pp. 664–665.) Most egregiously, the disclosures in Thompson, incorporating “phantom” numbers designed to mislead potential lenders, among others, did not come close to describing the true transaction between dealer and buyer. ( Thompson, supra, 130 Cal.App.4th at p. 961.) In contrast, the contracts between Raceway and the members of Class Two accurately disclose the economics of the transaction agreed to by the parties in all respects.  To be sure, a primary goal of the ASFA’s disclosure provisions is to “protect purchasers against excessive charges….” ( Kunert v. Mission Financial Services Corp. (2003) 110 Cal.App.4th 242, 248 ( Kunert ).) The ASFA attempts to achieve that goal in a specific manner, namely, “by requiring full disclosure of all items of cost.” ( Kunert, supra, at p. 248.) Here, despite full disclosure of all items of cost, the members of Class Two were charged fees that the parties now agree should not have been charged, so the goal of protecting purchasers from excessive charges was not initially achieved. It does not follow, however, that the “informational purpose of the ASFA [was] not served.” ( Nelson, supra, 186 Cal.App.4th at p. 1005.) We disagree that a contract can disclose accurately every dollar that is part of a transaction agreed to by the parties, and nevertheless constitute a violation of ASFA disclosure provisions. The members of Class Two received all the information that the ASFA required them to receive; among other things, they were informed, in writing, how much they were being charged for smog-related fees. They just did not act on that information by verifying that all of the listed charges were appropriate prior to signing.   Our conclusion—that section 2982, subdivision (a) is not violated in the circumstances of this case, so the trial court’s judgment in Raceway’s favor with respect to the claims of Class Two should be affirmed—does not leave other vehicle buyers who are charged inappropriate fees by dealerships without redress. It seems likely that one or another provision of California statutory or common law would provide such consumers a remedy—albeit perhaps not the rescission and restitution sought by plaintiffs under the ASFA—especially if, unlike Raceway, the dealership at issue was not forthcoming with payment of refunds, or had charged inappropriate fees with fraudulent intent. Class Two, however, asserts only a claim under the ASFA: plaintiffs did not appeal the trial court’s denial of class certification for Class Two’s UCL claims, and did not assert any claims under other legal or equitable theories. We need not consider here, therefore, what other claims might have been brought on these, or similar, facts. In addition, because we conclude plaintiffs failed to demonstrate any violation of the ASFA with respect to Class Two, we need not consider the parties’ arguments with respect to whether Raceway successfully cured any violation.